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EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, November 29, 1995

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[English]

The Chairman: Good afternoon, ladies and gentlemen. We have had a slight delay because of a speech delivered in the House of Commons by the Prime Minister. The speech is over, so we can start without further delay.

As you know, we meet here to discuss, in the form of a forum, fiscal disincentives to sustainable development and sound environmental practices. This is our last session. We are very pleased to have you as our guests and witnesses and we welcome each one of you: Mr. Dillon, Dr. Plourde, and Mr. Gale.

We leave it to you to decide who should begin your intervention, first by way of a personal introduction and then by way of a presentation that would allow the members to engage in a question-and-answer period shortly after. We will listen to your three presentations in sequence, without interruption, and then open the floor to questions and answers.

Mr. Dillon, we will give you the floor first.

Mr. John Dillon (Senior Associate, Business Council on National Issues): Mr. Chairman, I think we've agreed Dr. Plourde will go first. As you know, he is the chair of the task force.

The Chairman: By all means.

[Translation]

Mr. André Plourde (Director, Department of Economics, University of Ottawa): I am André Plourde and I am Director of the Department of Economics at the University of Ottawa.

[English]

I served as chair of the Task Force on Economic Instruments and Disincentives to Sound Environmental Practices.

[Translation]

Mr. Chairman, ladies and gentlemen, I'd like to thank you for your invitation to appear before the committee today.

In the few minutes I have, I would like to deal with the nature of the process surrounding the in-depth examination of the tax system and federal subsidies, as mentioned in the document on job creation and economic recovery, and then I shall deal briefly with the structure of the corporate income tax system.

[English]

As some of you may know, I served as chair of the task force, whose report was published at the end of November 1994. It's in light of this experience that I would like to offer some comments on the nature of the process that might frame the proposed baseline study.

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The task force counted as many as 37 members, representing a broad spectrum of stakeholder interests. Still, as large and as unruly, at times, a group as this produced, it wasn't big enough; a number of other stakeholder groups sought membership in the task force. So lesson number one is that many individuals and groups want to be heard on environmental issues. But the most effective way to involve them in this type of process may not be to bring them all together in a group and charge them with the task of producing a document.

Another aspect of the work of the task force seems relevant. I found that we would often reach a point where I thought we had resolved an issue, only to have it reappear later in the same meeting or at a subsequent meeting of the group. Some task force members pointed out to me that this was, at least in part, due to the fact that the group was expected both to generate a document and to react to the document they were generating. So lesson number two is that some separation of these functions might be desirable so that the expected contributions of individual participants and of the process as a whole are clear, and so that controversial issues can be brought to the fore.

In doing the baseline study, for example, the government may wish to rely on a two-level process. At the first level a small group of officials from key departments such as Environment, Finance, Natural Resources Canada - the list need not be exhaustive - and in conjunction with perhaps a few outside experts - and by ``outside'' here I mean from outside government - could undertake a study based on a clear mandate given to it by government, and after having solicited views from stakeholders as to the nature of the issues they would wish to see addressed. The object of this stage would be to produce a document that would then be used in a broadly based consultative effort with all stakeholder groups.

This type of process should be iterative, in the sense that consultation could occur on the basis of internal progress reports. In the end, you would not get a set of results about which all stakeholder groups would agree, but you would have completed a systematic analysis of the fiscal system. The same types of questions would have been asked about numerous different types of situations. In terms of information generation, I think this would be quite useful.

If such a process were to get under way in the new year, I would expect that the study could be ready in time for the consultations on the 1997 budget.

[Translation]

With your permission, I'd now like to say a few words about the structure of the corporate income tax system.

Experience has shown that this system can be manipulated to achieve different aims such as encouraging certain types of activities and discouraging others. It has also shown that although such manipulation does prove to be expensive, government seems unable to resist the temptation of resorting to such measures.

Let me mention three things which I consider to be arguments against the use of the corporate income tax system as an incentive tool.

[English]

First, doing so invites investment in activities that would yield benefits to one sector. While this may be profitable from the perspective of a given sector or sectors, it is simply wasteful to society as a whole.

Two, the benefits from such uses of the income tax system are generally made available to firms in the form of tax expenditures. This entire operation is, to say the least, opaque, and the firms receiving the benefits are effectively unaccountable to taxpayers.

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The third set of issues is related to enforcement and monitoring. In these types of situations it's very difficult to prevent seepage, or slippage, if you want.

In the end, what I end up with is a basic income tax system. The income tax system is designed to tax income, so get a measure of revenues, subtract from it a measure of the cost of doing business, treating forms of expenditures yielding benefits over time differently from forms of expenditures yielding one-time benefits, and then apply a tax rate to this measure of income. These rules are simple, they're clear, they're easily understood, and they're hard to manipulate.

If the government wants to move on other fronts, let the government identify these other fronts, and then use instruments that are better designed for these specific goals - instruments that are more transparent and that lead to more accountability than this differential access to tax expenditures.

[Translation]

Thank you.

The Chairman: You conclude at the most interesting point, Mr. Plourde.

[English]

Mr. Robert Gale (Research and Consulting, Ecological Economics): I'm a consultant with Ecological Economics in Toronto and an independent scholar. I try to spend as much of my time as I can writing. I occasionally get associated with the universities in that capacity, most recently as senior fellow with the Faculty of Environmental Studies at York University.

For my sins, I'm the chief editor of Green Budget Reform, which I understand has been introduced to you. Some of you have had an opportunity to look through it. This is my talisman, which I wave now in front of me wherever I go to ward off naysayers. I hope to come back to that momentarily.

I would like to thank the standing committee for inviting me to participate in this forum on fiscal disincentives and the environment. As part of the concluding panel, I would like to focus my remarks on ecological tax reform, that is, as you've defined in your own notes to participants, the shift in the application of taxes on income and employment towards polluting activities and/or unsustainable practices. I'd also like to take a stab at some suggestions as to how such reform could come about.

I would like to begin, however, by saying that although I have worked on economic instruments, I am a very strong believer in environmental regulation because of the very evident market failure that exists. I like what I see in the Canadian Environmental Protection Act and the revisions to it. I believe strongly in the need for government intervention to offset market failures and to address externalities, so I'd like to make that point.

I also believe in the voluntary approach. I think there will be a lot gained by the measures currently being put forward by the International Standards Organization, the ISO 14000 series on environmental management standards. I'm a critic of that process, but I believe that in the end it will provide enormous value and bring enormous discipline to organizations on environmental management issues.

I understand, as best I can, the limitations of economic instruments. I'd like to introduce for the record a paper I've written for the national round table called Environmental Taxation, Revenues, and Effectiveness: The Need for Principled Guidance. I will leave a copy with the clerk of this committee, and the paper is available from the National Round Table on the Environment and the Economy. The focus of it is that we need to have some principled guidance if we are to introduce environmental taxes.

I want to begin with some remarks from Green Budget Reform. In the first chapter I wrote, I state:

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I fully believe that. For me, the budget is the document to which I go to see what a government's environmental policy is. I've listed in my submission to you some of the reasons budgets are important. You know this, so I don't need to reiterate it here.

I think the problem with the budget process, despite the pleas from even the Auditor General from time to time, is that public expenditures are not adequately accounted for. They promote certain activities, but these activities are not properly vetted or scrutinized.

For me, the budget is absolutely critical to integrating economic, social, and environmental decisions. I think that an ecological reform package can be developed out of a budget process because it does give rise to the idea that taxes in a budget can be switched and that revenues can be recycled.

The question emerges: what is ecological tax reform? It's commonly defined as an attempt to achieve a wider use of labour and a wiser use of nature. I think it can tackle the three elements of sustainability directly. On the social side, I see it as being able to attack unemployment issues. It can certainly tackle environmental deterioration. It's also a way of increasing economic efficiency. In my view, ecological tax reform could provide a triple dividend, with an additional benefit of being able to provide revenues to retire the deficit/debt.

Ecological tax reform can tackle these problems by changing the signals as to what constitutes sound economic development. On the one hand, we tax the activities of people we should encourage: employees, entrepreneurs, savers and investors. On the other hand, we do not tax the throughput of energy and raw materials. In other words, we don't deal with the externalities question. This means we over-consume nature and under-consume people, in the words of the 1993 European Union white paper on growth competitiveness and employment.

I want to argue that ecological tax reform, or ETR, is not an embryonic concept; it's already under way. It's true that there is no master plan or policy on ETR in Canada, the United States, or Europe. But in Europe the approach is widely discussed in many circles. The ETR debated there has more to do with direction and pace than with the feasibility or desirability of the approach itself.

In Europe certain things are recognized. First, current taxes are distortionary. Second, taxes on employment are high and increasing, while taxes on the environment are small and stable. Third, prices do not reflect full costs.

I want to illustrate my argument that ecological tax reform is not an embryonic concept by referring to some recent developments as briefly as I can.

First I'd like to refer to a conference coming up next week in London, England, on December 5 and 6, which is called Managing the Costs and Benefits of Ecological Tax Reform in Britain and Europe. This is an industry-government conference. It costs 1,169 pounds, or almost $2,400, to attend. It's full of submissions from people who are in various government and industry capacities. The under-secretary of the treasury is speaking on environmental taxation. There's a spokesperson from IBM on the business case for sustainable development. There will be debates on tax inclusion instead of employment. The head of the environment section of the Confederation of British Industry is speaking on managing the costs of eco-tax reform. There's another section on eco-tax reform and planning ahead for European company interests.

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If you'll indulge me, I just want to quote from the brochure because I want to give you a sense that this is happening already. This debate is already under way; it's not hypothetical.

Companies operating in Britain and other EU countries face a new complex of threats and opportunities - a set of changes to the tax regimes of each major country reflecting political pressures and global concerns about the environment. These changes centre on increasing taxes on fuels and pollution, and reductions in taxes on employment, collectively known throughout Europe as `Ecological Tax Reform'.

The debate on eco-tax reform in Britain has focused on the UK Government's introduction of VAT on fuel, an annually escalating fuel duty on vehicles and most recently, a new landfill tax on waste disposal. Such market based instruments of environmental policy are becoming more popular throughout the European Union and North America.

Major challenges lie ahead for manufacturing industry in all EU countries, particularly in the Netherlands where energy taxes already apply, and in Germany where all political parties propose significant increases in energy taxation. In the UK, both the Conservative and Labour Parties are currently opposed to substantial energy taxation, given the difficulties encountered in increasing VAT on fuel. Nevertheless, British companies are likely to be affected by proposals from the European Commission, or a hardening of Government tax policies in this direction as the economic damage threatened by climate change becomes more widely recognised.

I'll just focus on the end statement there. They are focusing on the economic damage of climate change.

The benefits for attending this conference are cited as follows. Participants will learn:

I mention this conference as not an environment-NGO-led conference, but as a business-government conference on current practices and implications.

There are other documents I can introduce, but in the interest of time I'm just going to refer to them, as I have done here.

I have summarized the actual case studies, which is the amount of revenues raised and subsidies applied, in annex I of my submission to you. It's from the book Green Budget Reform. This is just to reflect that this is what's happening; it's not hypothetical. I've also summarized selected lessons in Green Budget Reform from the first chapter, again just to show you that there are some very concrete lessons.

I think you heard yesterday about the report of the transportation and climate change collaborative. They've talked about fuel tax increases. We could discuss that a little later. I'll just pass on from there for the moment.

The other thing I'd like to refer you to is U.S. tax forms. People always love to see these when I show them at the very end of my submission. I hope it's there; it's not in my copy here. Is it in your copy? There should be a tax table from the Internal Revenue Service. Is it there?

This is currently the U.S. practice on taxing chemicals. People are always surprised when I introduce that because it's a demonstration of practice.

I'm conscious of the time, and I don't want to cut into the next speaker. Some points to consider are that we are already designing economic instruments. Governments in Europe and North America are concerned that they can't increase direct taxation anymore. They're looking at indirect taxes. The third point is that I don't believe an overarching theory of ecological tax fiscal reform is absolutely essential before progress can be made; it can happen incrementally.

I have some comments on a strategy for ecological tax reform, which I'd be happy to come back to. But I think in the interest of time, I'll turn to the next speaker.

Thank you very much, Mr. Chairman.

The Chairman: Thank you, Mr. Gale.

Mr. Dillon.

Mr. Dillon: Thank you, Mr. Chairman.

I'm a senior associate with the Business Council on National Issues, which is a business organization representing 150 chief executive officers of major Canadian corporations. Our members are active in all fields of economic activity in Canada and in all regions of the country.

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Needless to say, the subject before this committee is a very complex one. I thought what might be most helpful from my perspective would be to give you a few thoughts on this issue from the perspective of the business community by focusing on a few key issues.

First there's the question of subsidies, which I know has been of considerable discussion before this committee already. Then I have a few words on both the use of economic instruments and the subject of ecological tax reform, which Mr. Gale has already mentioned. Finally I have a few brief comments or suggestions as to some possible work the committee might like to look at or possible priorities for it to include in terms of future work on this issue.

First, there's the question of so-called subsidies. I should make it clear that as an organization, the BCNI has for a number of years consistently held the view that outright grants and subsidies are fiscally unsustainable given current budgetary considerations in Canada. We urge the elimination of virtually all handouts to business, and certainly a more rapid elimination than has been carried out so far.

It's our view that government should not be in the business of providing subsidies that distort competition and the normal operation of the market forces. Many of these subsidies have been shown to be economically inefficient, and the jobs and industries that are not linked to economic fundamentals are unlikely to be sustainable in the long term. I'll just point out that the Auditor General last week, in his most recent report, noted that the claims of jobs created by some of the regional development agencies in the past have been extremely difficult to substantiate.

However, I do want to make a distinction here. I know the committee has heard a great deal from a number of speakers about the so-called environmental unsustainability of many of Canada's current subsidies. I would not want to be taken as suggesting that I necessarily agree that all of these subsidies are environmentally unsustainable. I think that's a much more complex and difficult question to answer.

I'm afraid that many people, particularly from the environmental community, tend to take a rather simplistic position. They question the environmental sustainability of the industry itself or the activity in question. Certainly the use of fossil fuels in Canada and around the world is an issue of considerable economic and environmental significance. These are not easy issues to answer. Clearly, many of the programs that have existed in the past were designed to pursue specific social and economic objectives. Undoubtedly, they also had unintended and detrimental effects on the environment.

I think it's also important to note that many of the speakers you've already heard from have identified this issue as well, but we have to be careful how we define the term ``subsidy''. As I said, our position has been quite clear on handouts to business. As we have learned from our trade disputes with the United States, a subsidy is often defined as what the other guy gets. Given the proclivity of trade interests in the United States, using their laws, to try to harass Canadian producers and producers from other countries on the basis of subsidy, I think it's important for this committee to think very carefully about how it uses the term ``subsidy''.

As Dr. Plourde has already noticed, there are a whole series of so-called tax expenditures that are no doubt important in this committee's work, but again which need to be treated somewhat differently from so-called subsidies and grants.

Turning to the question of economic instruments, this is, as Robert Gale already pointed out, an issue and a subject matter that's been with us for a considerable time. Yet we seem to have made not a great deal of progress, both in terms of understanding the benefits of economic instruments and actually applying them in cases in which they might prove both environmentally and economically beneficial. I should make it clear that from my perspective, the business community in Canada recognizes the need to integrate environmental and economic decision-making.

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Although a great deal of progress has been made in Canada in dealing with a number of our environmental problems.... That progress was pointed out in a report by the OECD that was released just a couple of weeks ago. An independent assessment team from the Organization for Economic Co-operation and Development visited Canada, spoke to many people in government across the country, and produced what was a very objective review of Canada's environmental performance.

If you only read the media reports of that document, I think you'd get a misleading impression of the amount of progress that's already been made in Canada on a number of environmental issues. However, it's clear there's a lot more to be done. The issue for many people in the business community is whether or not and to what extent economic instruments and so-called ecological tax reform can assist us in making more progress in those remaining problem areas.

Ideally, of course, we want to find solutions that reduce pollution and waste while also making firms more competitive. That, I think more than anything else, is the reason many business people are interested in exploring further the possibility of economic instruments.

As I said earlier, this is not a new concept. The so-called polluter-pays principle has been around since the early 1970s when it was formally adopted as a position of the OECD. In very simple terms, the polluter-pays principle means that those who pollute should bear the costs and measures necessary to ensure the environment is in an acceptable state.

It's also clear that the interests in economic instruments are driven in part by a recognition that traditional so-called command and control regulations have not always worked particularly well in the environment. They can be quite cumbersome. They require significant government and industry resources, and indeed consumer costs, and they have too often in the past dictated end-of-pipe control solutions rather than focused on more innovative approaches that might actually prevent pollution in the first place.

However, it's also clear that economic instruments are not the solution in and of themselves. Indeed, they are, as many people have noted, only one tool in an expanding tool-chest of approaches and opportunities available in the area of the environment. Clearly we should be using them as a complement or as an alternative to regulation when they make sense for the particular problem we're trying to deal with.

I should say that they also need to be set in an overall context in which governments are setting broad environmental goals. Economic instruments can be a more efficient means to reach that particular and already agreed to environmental goal. Needless to say, from the perspective of the business community, they are most effective when they provide the incentive for industry to change its process to find innovative ways of reducing pollution and emissions or indeed avoiding the problem in the first place.

The truth of the matter is that the kind of economic instruments I've described have actually been rather infrequently used in Canada. Too often, governments have implemented user charges and fees in the name of economic instruments, but have simply added these on top of already existing environmental regulations. This, of course, has led to a certain degree of cynicism among both businesses and consumers.

Economic instruments have, as Robert Gale was pointing out, been more widely used in Europe and in the United States. As an example, many studies have shown that the use of tradable permits in the United States brought about the phasing out of lead in gasoline more quickly and at less cost than would otherwise have been the case using regulations. In my view and in the view of many people in the business community, tradable permits or emission rights would hold considerable promise to deal with specific issues in Canada.

Turning quickly to the issue of ecological tax reform, which Mr. Gale has already described to you, as he has pointed out, this is not a new issue either, although it is certainly more current these days than it has been in the past. As he explained, the theory is to move our taxation system away from taxes on the so-called good things, like income savings and capital, and towards the ``bads'', like pollution and waste.

I don't need to point out to anyone on this committee that the idea of new taxes will be a tough political sell in this country, and indeed in many others. That's why many of the people who have talked about ecological tax reform have talked about so-called revenue neutrality: any new taxes need to be offset by reductions in other taxes. That's to improve their political saleability, but also obviously to ensure they don't have any undue impact on the competitiveness of Canadian firms.

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While ecological tax reform is an attractive theory and one that deserves careful scrutiny, it would be irresponsible of me not to point out that it will prove to be very challenging in practice. We should be aware of these kinds of difficulties before simply assuming that ecological tax reform is the way of the future.

I'd like to point out a few of those potential problems. As I indicated earlier, ecological tax reform assumes that taxes can actually change behaviour. I'm not sure whether Dr. Plourde would agree with this or not, but traditionally economists have said the purpose of a tax is not to change behaviour, but simply to raise revenue for governments.

The concept of ecological tax reform depends on an assumption that we will use less of a resource or a product if the price is higher. I don't need to tell you this is not true for all goods. Indeed, many of the tax systems we've constructed in Canada and other countries are based on the assumption that governments can continue to tax things such as alcohol and tobacco because the demand will continue to be high for those products, so they will be a strong source of government revenue.

Gasoline taxes, fuel taxes, are another item that people often raise as an example of the move towards ecological tax reform. But given the extent to which prices in gasoline fluctuate, one can easily question whether or not small increases in those taxes actually do influence consumer behaviour, and more importantly change driving habits, which as we all know are a contributor to a number of environmental problems.

More importantly, though, in terms of this move towards ecological tax reform, if these new taxes and charges are actually successful in changing behaviour, then obviously traditional sources of revenue bases will begin to dry up for governments. If they are successful and people use less of a product and engage in fewer polluting activities, then the revenues that might have been predicted from these new taxes will actually start to decline over time. We may find ourselves in a situation where new taxes have to be created to make up for that shortfall in revenue. Clearly this is a long-term issue and a matter of long-term debate.

In reference to some of the comments made by Mr. Gale with regard to the experience in Europe, I'd like to point out that while it's true they have been more innovative in a number of new taxes, it's also true that a number of those tax schemes have demonstrated exactly the kinds of difficulties I've talked about in terms of consumer acceptance, international competitiveness considerations, and exemptions being granted to a variety of individual interests. So this is indeed a very complex subject matter and one that requires a long-term debate and long-term study.

I would like to move to a few suggestions on possible next steps.

First of all, as I've already indicated, our organization and many other business organizations have gone on record in favour of further reductions in business and other kinds of subsidies.

Secondly, I agree with Dr. Plourde that there is a need for the baseline study we've all been talking about. But I would point out that the study needs to analyse the tax system and various grants and incentives from a sustainable development perspective, recognizing both the economic and environmental goals being pursued.

As Dr. Plourde has pointed out, there's a need for the expertise and analysis that exists within government departments on the various tax and incentive schemes, supplemented with the assistance and advice of a small group of knowledgeable experts from a variety of fields, obviously business and the environmental community amongst them. Clearly there's a need to maintain a close liaison with the work that's already under way within the OECD on this very same subject.

I have a couple more specific suggestions. As I indicated earlier, tradable emission schemes have considerable promise in this country. A number of people in the business community have been frustrated by the lack of progress in this area, so a recommendation from this committee to move forward on a pilot-phase tradable scheme might be very helpful. Both the Task Force on Economic Instruments, which Dr. Plourde chaired, and the Economic Instruments Collaborative of 1993, which I'm sure this committee has heard reference to, had a number of innovative ideas in terms of tradable emission schemes.

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Lastly, and this is a more personal view, I think it's time also for a pilot-phase study of one or more particular economic instruments. It could be an emission charge or a product fee. I think it's time to get down to the actual design phase of how something like this might work and see if we can come up with a way of moving this issue forward.

Clearly there would need to be criteria applied in how we would design such an economic instrument. You have to look at things like economic efficiency, environmental effectiveness of the measure, equity considerations with regards to regions of Canada, sectoral implications, and indeed who pays the ultimate price. Lastly, as I mentioned earlier, is the potential impact of any of these schemes on international competitiveness.

Thank you, Mr. Chairman. I'm pleased to answer any questions the committee might have.

The Chairman: Thank you. You've given us a lot of good material to work with, no doubt, and I'm sure our members are ready to ask you questions.

We'll start with Mr. Forseth.

Mr. Forseth (New Westminster - Burnaby): Mr. Dillon, you certainly highlighted the problem from the business perspective. So much of what we've heard at the committee in this particular series is a lot of esoteric theory, but you outline how hard it is to get from that level to practical terms and actually implement something that really delivers what we philosophically hope will be delivered.

I agree with you on the long-term analysis we need to do, but what about the short term? Can you talk about some short-term things we can do in the interim? We have a budget cycle coming up this year. What can the federal government do? You did mention the example of tradable schemes, and also experimenting on one particular tax that you can perhaps control the parameters of so you can see its effects. Can you expand on that and maybe give me some other ideas for the short term, all while acknowledging the long-term analysis that needs to be done?

Mr. Dillon: I'm not sure if I can give you much more in the way of specifics, but on the question of tradable emission schemes, two of the suggestions that were put forward - both by the Task Force on Economic Instruments and what was called the Economic Instruments Collaborative, which was sponsored by the national round table in 1993 - two of those areas are sulphur dioxide emissions to deal with acid deposition, and the other one with nitrous oxide, which as we know is a contributor to urban smog.

I think one of the difficulties the task force had, quite frankly, is that neither of those matters is strictly under federal jurisdiction; in fact, there's a large element of provincial jurisdiction. So anything that the federal government or indeed this committee could recommend would require the cooperation of the provinces.

The good news is that a great deal of the analytical and design work has already been done in those areas, and a great step forward could be made quite quickly on those particular areas.

Finally, on the issue of elimination of subsidies, I've already suggested that more could be done in that area.

Mr. Forseth: For the short term you say that a fair amount of background work has been done, that we could proceed with.... You're talking about some kind of a tax on sulphur dioxide and NOx. What are you thinking of specifically - of adding some different schemes?

Mr. Dillon: Sorry, my suggestion was for a tradable permit scheme in the area of sulphur dioxide and nitrous oxide, not a tax.

Mr. Forseth: All right. Could you expand? Do you have anything further to say about the experimental testing of one particular measure and controlling the variables around that?

Mr. Dillon: I'm afraid I couldn't state a specific example, but I think there are some in the Task Force on Economic Instruments report that might be worth pursuing. Clearly it's something that would need to be discussed with the industry affected, first and foremost.

Mr. Forseth: May I offer the short-term question to the two other presenters. I understand the long-term one, but you know the cycles of government and budgets and people who would be watching this program - they would want some pragmatic examples to hang on the theory. Maybe either of you could respond to the same line of questioning.

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Mr. Gale: Since often we talk about harmonization of taxes between Canada and the United States, one opportunity that would strike me is to look at the form in my submission about U.S. environmental taxes on chemicals, including ozone-depleting chemicals, and see what could be done in that regard. It seems to me there is an opportunity to look at that measure. I can't speak about whether that's being done or not, but I'm struck by the fact that the U.S. has raised $1 billion with its ozone-depleting chemicals tax, which has proven very effective and has surpassed what would have been achieved by regulation.

My question would really be what is the relevance of this tax table to Canadian fiscal policy? Could something be done along the same lines for the budget coming up?

Mr. Forseth: I see you've given us a concrete example. Here is the tax form, 6627. I take it this is given to a refinery.

Mr. Gale: This is for any U.S. business that either manufactures or stores chemicals on its premises. For example, we can look at chlorine on the first page, which is taxed at the rate of $2.70 per pound in the warehouse. I'd have to check my notes to see how more precisely it is applied. But the attractiveness of this table is that it's all worked out.

If we are interested in harmonization, here's a perfect opportunity for harmonization to take place. We usually argue that measures can't take place because the United States isn't doing them. Here's an example in which the U.S. is doing something on which we could follow suit.

Mr. Forseth: I assume that because the various substances have differential ratios and numbers, there's been a considerable amount of study to back up why one would be at $4.45 and another would be at $3.41.

Mr. Gale: That's correct.

Mr. Forseth: Okay. Thank you, Mr. Chairman.

The Chairman: We have now Madam Kraft Sloan, please.

Mrs. Kraft Sloan (York - Simcoe): I apologize for missing a lot of your presentation, Dr. Plourde. Unfortunately, today the nation's business has come ahead of committee business. But I have really enjoyed this presentation because we have covered the full range of talking a bit about theory and ethics, as well as looking at some good practical examples.

In response to environmental tax reform, I guess there are different ways of looking and thinking about the tax system. It's not necessarily so that changes in the tax system don't change behaviour. I think of the registered retirement savings plan program that's administered through the tax system. It's certainly a way that a lot of Canadians save for their future. In fact, the government subsidizes that to the tune of $14 billion, so I would say that is fairly significant.

I also think that if you're going to take a look at environmental tax reform, perhaps you want to look at other things that link with it. For example, if there were an additional cost of being in a certain kind of business or producing a product in a certain way, you would have another program to which that money could be directed to offer the public alternatives. If we wanted to take a look at the area of energy, then, some of that money could be directed to alternative energy so we're actually giving people choice. They can start to use different things to enable them to change their behaviour.

Also, if by undertaking environmental tax reform, revenue started to go down because people stopped polluting, I think the government would save costs as well. Revenue goes down but expenditure goes down likewise, especially in the area of environmental remediation and health-related costs.

So I guess I had a little difference of opinion on some of those things.

But I was wondering, Mr. Dillon, whether you could give us the position of the Business Council on National Issues on full-cost accounting, taking externalities into account.

Mr. Dillon: As an organization we do not have a position on full-cost accounting. But I can tell you that a number of people in the business community have looked at the issue, and as in the case of things like ecological tax reform and economic instruments, there is no one uniform view within the business community on something like that.

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There are a number of considerations for a country such as Canada. The first question is, when you say full-cost, what do you mean? How extensive is it? What kinds of costs would you include - full social, economic and environmental costs?

Some of the theories that have been put out about full-cost accounting quite frankly are frightening to people in the business community and I think would be frightening to consumers if they thought someone was going to actually attempt to tally all those costs, put value on all those things and then charge them the prices to reflect those costs.

Having said that, as I said earlier, most people in the business community do accept the polluter-pays principle, which means that those who pollute pay the price of ensuring the environment is in an acceptable state. Obviously the debate about what is acceptable and what is unacceptable is one we've been engaged in for many years and will continue to be.

Again, full-cost accounting is a theoretical ideal, the practical implications of which have all of the considerations I mentioned earlier in terms of international competitiveness, particularly for a country such as Canada, which as you know is highly dependent on a number of natural resource products as a significant base of our economic wealth.

Mrs. Kraft Sloan: Take a look at a country such as Germany, where they have requirements that producers of automobiles or television sets are responsible for not only the processes involved in producing these products but also the retrieval of these products when consumers are finished with them. As a result, they really build in the pollution prevention idea, because any kind of material that goes into components is then going to be easily extractable, easily broken down. It has some value. So it deals with a whole process.

I have some concern. I am a supporter of the free market myself, but I don't think the free market really works efficiently and effectively until we take all the costs into effect. If we take a look at the free market as it exists today, it's in a somewhat immature state. I'm just wondering how some of the other witnesses might respond, as well as Mr. Dillon.

Dr. Plourde: We may be asking the free market to do something it can't do. If there is not a market in pollution permits, for example, or something equivalent, by definition it cannot take these costs into consideration, unfortunately.

There is a factor of production out there called the environment, and there is no way of buying and selling it. It's just there; it's used. It's in that sense that there is a role for the state in working with the market to correct these types of situations. The problem with that, of course, is there are winners and losers in this game. Some people are all of a sudden asked to pay for something they've never paid for before. It's a difficult situation.

In some of the discussion around this, a parallel comes to mind. When the IMF and the World Bank go into a developing country and basically decide it's time for this country to do some form of structural adjustment of their economy, they don't linger over possibilities of how long it should take and how much information should be gathered. They apply some very specific rules. In a sense there might be a lot of benefit for this committee or others to develop similar types of basic rules saying you must do these kinds of things.

The notion of international competitiveness comes back to haunt you from the IMF perspective. If we force this type of behaviour on developing countries and are not prepared to do it ourselves, there's a difference in our discourse.

Mr. Gale: I'm going to be perhaps a little controversial. My experience with industry is that industry doesn't want to be regulated, and when they are regulated they argue for the voluntary approach or economic instruments. When they find out what the full impact of economic instruments will be - full-cost accounting and so on - they quickly discover they don't want that either because that's going to hurt as well. Then they switch to the voluntary approach, in which they want to police themselves. Then you've come full circle and government is forced to deal with market failures and back into regulation.

.1640

I would argue that we need these three suites of instruments - the voluntary approach, regulation, and economic instruments. But the way to deal with industry concerns on competitiveness, profitability and so on is to develop transition strategies, recognize where the hurt is occurring, and recycle revenues in a fashion that helps the transition.

From what I've seen in the literature, if a simple signal is given, and that signal is consistently applied over a period of time without change, industry will get the message that they have to cost-internalize and adjust, that they can make those adjustments without too much upset. Where there is upset, transition strategies can help.

I tend to talk about cost internalization rather than full-cost accounting. I think it's easier to get more buy-in when you talk about cost internalization. Full-cost accounting, as Mr. Dillon has indicated, raises the spectre of concerns that are somewhat unanswerable, but cost internalization can probably be more readily answered.

Mr. Reed (Halton - Peel): One person's sustainable is often another person's degradation. It depends on whose ox is being gored at a particular time, what the vision of the environment is, and the vision of the impact on the environment.

B.C. Hydro has tried to take the bull by the horns when it comes to things like full-cost accounting. They have published a book, an invitation for proposals for power development in British Columbia. They've taken a stab at putting a monetary figure on the various environmental impacts. In other words, if you build a nuclear plant, you have a cost in terms of high-level nuclear waste. What do you do with that and how do you factor that into the cost of electric power? If you take a coal burner and you have so many tonnes of sulphur going into the environment.... They've attempted to determine the dollar value or have monetized those sorts of things.

I'm not sure how successful it's been to this point, but I think it has helped clear the air regarding certain choices that are made in power generation. In provinces where emphasis is put on environmental concerns that perhaps should not be environmental concerns at all, we are still seeing....

I can refer to hydro power development because I'm hands-on familiar with that. One of the problems with hydro power development is that God never made an ugly waterfall. It is an environmental concern to some people and so on even though its comparative impact may be the least vis-à-vis all other forms of generation. So other forces tend to interfere with our concept of what is sustainable.

We've been wrestling with this word ``sustainable'' for quite a while. Whether it's a valid word or not, I don't know, but it seems to me that some human endeavours are more sustainable than others, and that some endeavours could become more sustainable than they are at the present time.

.1645

For example, when oil refining was in its infancy, gasoline was dumped into the creeks because it was considered a waste product that was not usable. The product that industry was after was the lubricating qualities of the heavier product. As time goes on, in many cases industry has moved ahead dramatically and has changed the way it operates. For instance, the water that comes out of a refinery is often more potable than the water that went into the refinery to begin with. So there have been some gains.

Should we be rating sustainability? Should we be putting these things on a scale?

Mr. Dillon: In contrast to my colleague, Mr. Gale, I don't agree that industry's first reaction when people talk about economic instruments is to decide that it will cost too much and that they prefer something else.

You're absolutely correct. I know of a number of examples in addition to B.C. Hydro where industries and companies are looking at cost-internalization from the point of view of getting a better fix internally. They're doing so not because it's been mandated by government or because some bureaucrat is going to decide the cost of something, but because the company or industry itself is trying to better understand the costs of various products, by-products and emissions, and what the alternatives are. That has already had an impact on a number of electrical utilities and chemical companies in changing the way they do business, and recognizing where the problem areas are and where there are opportunities to do a lot more.

To answer your question, I suspect that if you asked ten Canadians, you'd get ten different answers about what the environmental priorities are and which activities are more sustainable than others. To some extent we are all creatures of our own experiences and habits. What I think might be sustainable or more sustainable kinds of industrial activity or consumer lifestyle choices would not necessarily coincide with what someone else might think.

That's a debate we have already engaged and will continue to engage in this country. In the battle of public opinion, ultimately governments have to make choices and decide which issues and environmental priorities they are going to focus on. The good news is that a number of industries, as I've already indicated, are taking on that challenge internally. They are redefining their businesses and trying to understand what both government regulations and consumer demand might bring.

If you're in the chemical industry, the chlorine business, the pulp and paper industry or nuclear energy in this country, you have to understand that in the coming years all of those factors will have a real impact on the way you do business. It's only responsible business practice to try to understand what those impacts might be and to orient your operations to deal with them.

The Chairman: Mr. Steckle.

Mr. Steckle (Huron - Bruce): Thank you for appearing this afternoon. I appreciate some of the things you've said, but I think we have an area here that we could explore for a long time.

We're living in a different economic environment than we were a number of years ago. As governments - and we being part of government - we are going to find it more difficult to attach taxes to certain measures and objectives we may have. Do you think it would be easier to attach taxes in a way that they are hidden, or would upfront taxes be better? We know that people don't like corporate taxes and income taxes, so we have attempted to hide some of the taxes. Do you think government is better served by taxing that way rather than in a direct way? What is your feeling about that?

.1650

Mr. Dillon: I can answer from my perspective. We believe that taxes should be visible. We were among those who argued for the visibility of the GST when a lot of people suggested it should be hidden.

If the objective of new taxes is to help people understand actual environmental and other costs of the products or services they might be using, I don't think you serve that purpose by hiding the tax. It has to be clear to people when they buy the product that not only is there a tax applied to it, but if we decide to go this route, there is a specific environmental charge applied to it.

They also clearly have to understand that the tax has a purpose. A number of taxes, including tire taxes for example, were collected by government for many years, but nothing was ever done to deal with the disposal of tires. So it's very easy to breed consumer cynicism about environmental taxes unless they clearly understand what's being done with that money to resolve the environmental problem.

Dr. Plourde: I think whether the tax is hidden or visible is of minor importance in terms of the reaction of consumers and producers to the change in relative prices. From that perspective I think it's a minor issue. It may be politically more difficult if it's visible, but it's much more accountable. People know why this is going on, but in the end do you ask whether people actually buy less of product X because there's a GST? I don't think that matters. In the end I think whether it's visible or not matters very little. From the perspective of accountability, however, I think it matters an awful lot.

Mr. Gale: I think we are witnessing a move from direct to indirect taxes. I believe in visibility. I think it's important to see what one is being taxed for.

There are other areas in the economy that could be taxed, and I'm thinking of some variation of the Tobin tax. I think we need some way of taxing the general externalities we can't get at through the market system. It strikes me as rather puzzling that we have more money in circulation in society now than ever before, yet we're faced with huge public debts and deficits and less money for public programs and services.

As I saw the Dow Jones industrial average cross the 5,000 mark, it struck me that a transaction charge ought to be levied on the sale of stocks and shares. I don't speak idly here. I'm a minor investor, but that is a market I happily trade in. I'm a capitalist in that sense, but I would be happy to see some portion of that transaction levied to deal with externalities.

I think we need some really big mechanisms to tax externalities, and we have to think in the billions of dollars. If we're not thinking in the billions of dollars, we're off by a factor of 10 or 100.

Mr. Steckle: Something Mr. Dillon alluded to earlier was the fact that we do not tax to change behaviour, but rather to raise revenues. I might cite a number of examples. When the GST was applied, it caused a number of things to happen in the marketplace. As the real estate industry will tell you, people moved from new homes to older homes; there's been a tremendous downside to that industry because of that. So there's been a definite response to that particular tax. There's also been a direct movement of millions and perhaps billions of dollars into the underground.

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Take the tax on cigarettes, the impact of that tax. What happened when we reduced the tax? There are some who would argue that more people smoke. Others would say that isn't true. But the fact is there was a direct impact on that industry because of the movement of taxes.

The Chairman: One moment. Please keep in mind the mandate we have in front of us in asking your question.

Mr. Steckle: We had the agriculture groups here the other day. When we see certain taxes being applied where there is no possibility for the farm group, the producer, to attach the added cost to his commodity simply because someone, government or otherwise, has applied a certain notion that certain things have to be taxed....

Now I see in the comments here that international environmental agreements are an important motivating force in guiding a country's environmental policy development. I think it's important that when we do these kinds of initiatives, we do not create undue burden on certain sectors within our society.

Mr. Dillon: If I might, Mr. Chairman, I just want to correct one impression that may have been left. I did not mean to suggest that we never design taxes to change behaviour. Clearly we have and will continue to do so. What I meant to suggest is that many of the taxes that have been talked about were not designed that way.

If we're going to start designing new ones to change behaviour, we have to think about how that would actually be done and whether or not they would be effective in changing behaviour. As I said, if they do change behaviour, we have to determine the impact that has on the revenue base. I'm not sure whether my colleagues want to comment on that point or on the other question you raised.

Dr. Plourde: If I may, I apologize to all of you. I have to leave relatively soon, but I would like to address your point.

Whether they are intended to do so or not, taxes change behaviour. That's why we say they're distortionary. What is it they distort? They distort behaviour. That's the point of it all. Whether they were designed to distort behaviour or to change behaviour, the point when we argue that taxes are distortionary is that the precise meaning of the word ``distortionary'' is to change behaviour. In economics jargon, it's usually because they change relative prices and that sort of thing.

In a sense, we have to start realizing that some of this will happen whether we like it or not. Then it becomes an issue of whether we want the secondary effects. Do they do what we want them to do? Are they the most effective mechanisms to do what we want them to do, or are the secondary effects really something we have to worry about?

The Chairman: A red light could be interpreted as being distortionary to my desire to go fast without a stop and forcing me to adopt a different speed. So what you're calling distortionary may be called an inconvenience, perhaps, that certain taxes impose on us, but not necessarily a distorting behaviour - a change of behaviour maybe, but not a distortion. Who is to determine what a non-distortion is, quite frankly?

We need to know from you something more urgent before you leave. Therefore, I'm jumping in at this stage to ask you whether you can give us advice, in addition to the advice you gave us earlier, on the lessons you draw from the task force experience. If it were to be launched, would you consider it to be a baseline study? What timeframe, in your opinion, do you think would be required for it to be completed?

Dr. Plourde: It depends on the mechanism you choose to do it, and it depends on the extent of consultation that goes on. In a sense, once a clear mandate is specified, this is a relatively straightforward exercise. Once people understand what the objectives of the study are, I think the information is readily available. You agree on the methodology and you go and do it.

However, I think there's a need for consultation concerning whether the right issues are in mind. My feeling is that if you started in the new year, there's no reason not to think this would be available for the budget consultations for 1997. It all depends on how.... If you think you're going to ask 100 people to do a baseline study, you can come back in a few years and it won't be completed.

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The Chairman: Who should be in the driver's seat?

Dr. Plourde: My feeling is that there is an asymmetry in the availability of information. At this stage I would argue that people in government departments probably have more information about a cross-section of things than out in the real world, if you want. So in a sense I would see that it should be driven internally, but by all means with some input from outside.

The Chairman: The next question has to do with the composition. You spoke earlier about two tiers. Can you elaborate any further on that concept?

Dr. Plourde: I think you need to separate the notion of making the study, of undertaking and completing the study, and the fact that there needs to be consultation about the issues and =1638=] whether or not the issues that are felt to be important are in fact addressed by the other mechanism. The criticism aspect should be separated in a more formal way from the completion of the work.

If you were to undertake a baseline study, I would recommend it be done by a relatively small group of well-informed people. Once there is a product, once people can actually read something and comment on it, then take it out for consultation quite broadly to all stakeholders, not necessarily to only 37. There can then be some interaction. After this information-gathering exercise, you can then go back and modify what's been done in the study.

In the end if one thinks one's going to end up with a piece of work everybody will agree with, it's not going to happen. In a sense you want to make sure the issues that are important to the stakeholders are being addressed within the confines of the study.

The Chairman: Would it be helpful if the task were to be assigned to an institution outside government?

Dr. Plourde: I would argue that it needs input from government officials because typically these officials have ready access to more information than people in institutions. So from that perspective I would urge at least significant participation from inside. I think you extend the deadline if you push it outside government. That's a personal view.

The Chairman: So you feel greater speed would be achieved within the governmental institution?

Dr. Plourde: From the perspective of the information available, I would argue that the study can be done more effectively within government with contribution from outside than with no contribution from government officials and the study to be undertaken outside.

The Chairman: Could you have studies undertaken outside with government participation and contribution?

Dr. Plourde: Yes.

The Chairman: Would you see a baseline study, once completed, being reviewed annually?

Dr. Plourde: It depends on what you understand by a baseline study. My feeling is that this is a description of the fiscal system. If the fiscal system changes, then it should be updated. But unless people discover poles, issues that are not addressed, I don't see the need for this updating if things don't change.

The Chairman: Budgets change the total fiscal structure from one to another, thus probably affecting the baseline.

Dr. Plourde: You might want to make the system more automatic, whereby once the changes come in there is, if you want, something that automatically goes to what might be called the baseline to consider the effects on this baseline picture of the changes proposed. This could be done internally and could be an annex, for example, to the budget.

I don't see this ongoing redesign argument, because you now need to design a study. It's never been done before, whereas once there is broad agreement on what the parameters of the study are, you can just keep on repeating it at a relatively much lower cost.

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The Chairman: We have heard about the trend towards a shift in taxation from capital and income to consumption and energy, with consumption in particular. What are your thoughts about this trend? Is it achievable within our economy that is so much dependent on energy? What social implications might the shift have?

Dr. Plourde: That's a lot of questions.

First of all, unfortunately from a standard economist's argument, if there are individuals who are not bearing the full cost of their activities, you want to change something to make them bear these full costs. Whether we call this cost internalization or full-cost accounting or whatever, it seems to be a desirable direction to go in, period. However, this being said, does it mean we then have no need for other mechanisms of taxation that cannot be answered until we proceed with that argument?

The Chairman: Let me ask my colleagues whether there are any questions for you before you leave and we start another round. Is there anyone who wishes to ask a question of Dr. Plourde?

Thank you for your participation. I hope we didn't hold you up too long.

Dr. Plourde: Thank you, Mr. Chairman.

The Chairman: Before we start a second round, I apologize to Madam Payne. Would you like to ask some questions?

Mrs. Payne (St. John's West): Mr. Chairman, I just had one short question and actually most of it has been answered. I'll just apply it.

We talked about the taxation or taxes and full-cost accounting in terms of energy. I'm wondering just how far you can go. I'm thinking now of the mining industry and the mining of products that are pollutants to help more so than the environment...but certainly they would be polluting the environment as well as helping. These industries have to pay workers' compensation in order to pay the costs of health programs. How far can we go in terms of cost internalization?

Mr. Dillon: That's a difficult question to answer. It's one of the things I tried to address in the question related to full-cost accounting. Clearly any attempt to itemize and calculate all costs would not only be extremely complex and controversial but would probably end up in costs that many would be unable to pay.

It's a particularly challenging issue for a country such as Canada, as I said earlier, which is heavily reliant on a variety of natural resource industries, including the mining industry. It's important to understand that a lot of the people who promote this concept the most, and a lot of the governments that tend to promote this concept, are those that are not nearly as reliant as Canada is on natural resource products.

I hesitate to suggest there are strictly trade interests involved here. But we'd be naive to think there aren't those governments and those people in those countries who are looking at it very much from the interests of their own trade, and recognizing that some of their competitors who would have higher costs in these areas might be differentially affected. Not only is it an issue of ensuring that these kinds of taxes, if they were ever implemented, would be internationally coordinated, but it's also important for countries such as Canada to understand the impact it would have on specific industries.

As well, obviously, given the economic structure of Canada and the regional structure of where a lot of our natural resource industries are located, clearly this kind of system.... Unless, asDr. Plourde was suggesting, one can devise a way to try to cushion that impact through things like revenue neutrality and other mechanisms, if those cannot be designed effectively and efficiently, then you do end up in a situation where Canada could be adversely affected by these kinds of schemes.

As I said earlier, there is no consensus in the business community that we should necessarily be rushing ahead in this direction, because of the kinds of issues I mentioned.

.1710

Mr. Gale: I would answer the question in terms of recycling revenues. If mining companies are faced with high workers' compensation schemes, and we want to shift taxes off that component, then we can shift it to the polluting side, to the chemicals used in the mining process. We can try to achieve some sort of revenue neutrality or maybe even some kind of tax break, as long as at the end of the day their environmental efficiency improves. I think there are ways of doing it.

Mrs. Payne: The point I think I wanted to make was the one Mr. Dillon did make - one of the points, at least. That is, how badly it affects our competitiveness in the final analysis.

Thank you, Mr. Chair.

The Chairman: Mr. Gale, do you want to answer that?

Mr. Gale: On competitiveness? There are many types of competitiveness issues. One of them is whom are we competing against. I do think that by examining what the level of competition is and breaking down what the competition question is.... Is the competition question that labour is too expensive? Is the competition question that the ore is not sufficiently rich a body that it's going to generate lots of profits? Are we competing with Indonesia or Chile?

I think there are lots of questions there and I think in some instances the answer is that we can't compete effectively. We have to accept that in the same way that we can't compete effectively in printing or other industries. That would be my answer.

The Chairman: All right, then, we are on the second round.

Mr. Gale: Mr. Chair, if there's an opportunity, I'm keen to pick up on your questions to Dr. Plourde. I have some answers in that regard that I could hold forth on.

The Chairman: Fair enough.

Mr. Gale: The question is your question about a baseline study. What I wanted to say is that when I was manager of Toronto's environmental protection office, we were required to produce a state of the environment report and a state of the city report. In order to do so, we had to establish a baseline for a particular year to have some benchmark for comparison purposes. Eventually we agreed on 1988, because that was the year for which it seemed we had a good deal of information.

A lot of the information was incomplete, but we thought we'd start. This was in 1992. We went back to 1988 data and used that as a point of departure and we built up a state of the environment report for 1988, with as many indicators as we could get and as much data as we could get for that year. That obviously began an iterative process whereby the city is now in a position to revise its state of the environment report periodically and improve on it in subsequent years.

It would strike me that a baseline study on fiscal disincentives in the tax system would be the same type of thing. You may not get it right the first time around, but one could improve on it on a annual or periodic basis.

I think there must be an awful lot of information available. I remember when the Nielsen task force was struck. There were huge efforts under way ten years ago to look at public expenditures, and all sorts of documents were created. A lot of information was generated at that time on subsidies to business and industry, and I even got involved in writing a report on one aspect of it at that time. We've moved a long way since then, but there clearly has to be a lot of information available.

It would strike me that the model that would make the most sense is the model that really has government front and centre in providing data, perhaps with some external parties. I'm a little hesitant to think that research institutions would have the capacity to do this kind of work or get the kind of cooperation that may be required. If it has to be an outside body, I would suspect that one of the large accounting firms might have more success than some of the research institutions in doing a study of this nature, but I'm not suggesting that model either. I think a government-led model might make more sense.

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I've also been struck over the years by how the Auditor General has expressed interest in public expenditures. I would wonder, not knowing the mandate entirely of that office, whether or not the Auditor General could be involved in some capacity or whether someone could be seconded from the Auditor General's office to be involved in an inquiry into a baseline study.

While I keep hearing about the importance of Finance and Natural Resources and Environment and so on, to me it would also be absolutely essential to have the new Department of Human Resources Development involved as well to look at the employment side, and to have a study on the fiscal disincentives to environmental protection but also the fiscal disincentives to employment. Here I see some sort of convergence.

I think I would avoid a process that involves a lot of stakeholders. It strikes me as a public expenditure issue, a government issue. When you get a large number of other stakeholders involved, you're going to run into the interests that are affected and I think that might be difficult.

So that, in a nutshell, is my view.

I also agree with Dr. Plourde that it's not necessarily a very complex thing to do. Even the summary of the framework for analysing public policy...sound environmental practices in the task force report would be one way of doing it. One could get started very quickly.

I would add to the very first box in this framework that the baseline study would need to add targets in addition to objectives so that it knows what it's trying to pursue. One would assess the Income Tax Act, the GST legislation, and any other relevant acts on a line-by-line basis.

I didn't bring it with me, but I have an old Woods Gordon report - they're no longer in existence - that did just that ten years ago. They looked at the Income Tax Act and the Excise Act and assessed them on a line-by-line basis according to how they affected environmental protection.

From my point of view, it's not too difficult to do. It can be done within a year. It ought to be done by government, with additional input from other people to make sure it's broad and comprehensive. Ideally you would have the Auditor General involved for some sort of official blessing from another agency. It is eminently doable.

The Chairman: That's extremely helpful. Thank you, Mr. Gale.

We'll now recognize Mr. Forseth.

Mr. Forseth: Today we've heard a rather optimistic discussion about changing business - that they are doing it themselves, that responsible business practices are coming. They are indeed internalizing the cost of their activities. Business, you're saying, is increasingly being environmentally friendly. But I would think certainly they're not changing just because they want to wear halos.

I'm asking you to maybe hit this one out of the ballpark; it's a real opportunity for you to describe what really is driving these changes that have come along so far. Perhaps that could then give us some direction as to where we should be going in the future, to go with what works.

Mr. Dillon: I think you've hit on some of the factors already. There are obviously a variety of stimuli that move corporations in particular directions - certainly their public image, the sense of importance that the public gives to the environmental issue. Regulations drive companies, although not always in the right directions. As we all know, regulations sometimes specify particular kinds of solutions rather than giving industry the flexibility to come up with more innovative ways of doing things. Clearly regulations have had an impact, but I think ultimately it's the marketplace and shareholders that have the greatest impact.

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Shareholders are much more sensitive, both individual shareholders and the institutional shareholders who are so important now in terms of who holds stock in Canadian corporations. They understand that companies that are not performing well environmentally are decreasing the value of the assets, the value of that company and ultimately the shares that are held by institutions and ordinary Canadians.

All those factors are having a real influence on specific industries. As I mentioned earlier, if you're in the chemical business or the pulp and paper industry, it's clearly a global business. It's not just a question of consumer attitudes in Canada. We've seen that in some people's views certain environmental groups...not based on sound science, but nonetheless they have had a real impact in terms of Canadian products that are sold in other markets.

I think ultimately what drives most corporations is the marketplace and the shareholders, much more so than the desire to have a good public image.

Mr. Gale: From my perspective, over the last ten years we've seen a shift in the type of stakeholders a corporation has to account to. It used to be that corporations were responsible only to a small body of financial stakeholders, those that had equity in the company or those that had provided loans that they wanted to see paid back. Beyond that they weren't really accountable to the broader public.

At least since the Brundtland Commission in 1987, we've seen the emergence of other stakeholders. We can classify these stakeholders in different ways, but let's just say that there are stakeholders for future generations, stakeholders for intergenerational equity, and stakeholders for biodiversity and the carrying capacity of the planet.

Let me identify those stakeholders more specifically. They're non-governmental organizations; employees of the corporations themselves, because employees want to work for sound corporate citizens and not for corporations that have bad records on the environment; the general public; and communities. This is just a small list of this emerging body of stakeholders.

This new body has an economic interest, but it also has a survival interest. I think that's what's changed. People now have a survival interest in what corporations or any organization is doing.

Mr. Forseth: You've really underscored for me the pervasive need for government intervention through all its unique ways, with economic and regulatory instruments and all the rest of it, but with the need for government to intervene.

Mr. Gale: Yes, I tend to buck the conventional wisdom. I am strong a believer in government regulation in the three instruments that can be applied at the voluntary level, with economic instruments and regulation. Economic instruments are only successful if they're backstopped with solid regulation. Voluntary instruments won't work unless there is a threat that there's more regulation to come.

Mrs. Kraft Sloan: Mr. Dillon, I just heard you say that while environmental groups' work isn't based on sound science, they have been helpful in moving things along. Well, over 2,000 Nobel Prize winners have said there is a problem on this earth. I would think that some of their work is based on sound science. I just wanted to bring up that point.

Dr. Gale -

Mr. Dillon: Am I allowed to respond to that?

Mrs. Kraft Sloan: Sure, you can respond.

Mr. Dillon: I think my comment was meant to suggest that in the view of some people in the industry that was targeted, certain environmental campaigns in Europe were not based on sound science. I certainly did not intend to suggest, nor do I think I did suggest, that the work of environmental groups or indeed of many of the scientists who work in this field is inherently based on unsound science. I would not want to be associated in any way with that kind of a characterization.

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Mrs. Kraft Sloan: Thank you very much for clarifying it, because that's certainly not the way it came across.

I was just responding to Dr. Gale's comments that any work we do in this area considers human resources. If we take a look at sustainability, where we're talking about the integration of ecology, economics and social equity, that's absolutely important.

When we take a look at some of the activity in the tar sands and where they're lobbying for accelerated capital costs on those projects, they're not economically sustainable. They're not ecologically sustainable. When you take a look at the per-unit production input in human labour, it actually decreases. On the other hand, if you look at a retrofit business or some alternative sources of energy production, there's far more labour. When you have more people working, it actually acts as a cost reduction for government and society.

Given that Canada is a country that has a strong reliance on its natural resource base, it is absolutely crucial that we ensure that we conserve this resource base, so we don't just gobble it up overnight.

We've seen a fishing crisis on the east coast that has brought incredible hardship, economic and social hardship, as well as ecological devastation. We're facing a similar problem on the west coast. So it's absolutely crucial that we conserve our natural resources and look at ways to add value to our natural resources, which support consideration on the human resource side.

As far as competition is concerned, another issue of competition is the time line. Are we competing in the next month, or are we competing ten years from now?

With respect to some of the policies and with the high oil prices at the beginning of the 1980s and the end of the 1970s, it's been well documented that the countries that allowed the market prices to operate, the countries that did not artificially protect their industries, have done very well competitively. Indeed those are the countries Canada is trying to compete against. I'm talking about Germany and Japan.

Over the long term, competition is enhanced. A lot of times this debate is long-term/short-term. I'm interested in future sustainability. In the long run, our deficits and debts are decreased.

I'm just wondering if Dr. Gale or Mr. Dillon would like to comment on developing a strategy for ecological tax reform and how we might proceed in that area. I know you've been talking about it in general, but I'm just wondering if there is a strategy. Is this something we want to entertain?

Mr. Gale: My response would be to start with a carbon tax, a related switch in taxes for many reasons. That serves as the most useful point of departure.

I understand that Colin Isaacs spoke yesterday to A Strategy for Sustainable Transportation in Ontario. On page 24 of that document there's a reference to the fact that an annual price increase of 3¢ a litre on gasoline in Ontario would achieve a 20% reduction in carbon dioxide emissions by the year 2015, and it would also generate annual incremental revenues for the Ontario government alone in the order of $2 billion. That's $2 billion each year to the year 2015 for that additional 3¢. It seems to me that one could use that revenue to assist a shift or a switch in the tax system.

So you're taxing something that's known to be an economic ``bad'', as it were, because it's contributing to climate change. You reapply that revenue to other activities or to reduce taxes on labour.

I'm a believer in that model. I have an old OECD chart for 1990 that talks about a hypothetical $50-per-tonne carbon tax, which shows that Canada could raise $6 billion with such a tax. That seems to me to be a useful figure that would then be used to reduce income taxes, reduce the deficit, or apply to other parts of the equation.

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As to a mechanism, as to how you do it, I have set out some observations at the end of my paper that don't say how you do it; they just say what not to be afraid of.

In general, if we can say that economic instruments have merit, that's half the battle. If we're already in that debate, if we're already instituting environmental taxes, then sooner or later we're going to get some of this shift.

In Ontario, right as we speak, we're learning about major cuts. Next year the agenda is to reduce taxes on personal income. So some of these things are happening already. One could perhaps argue that there's a bit of a convergence in agendas of both the left and the right, both in Canada and in Europe.

Another point on the strategy is that we can get awfully caught up in the details, and that's a mistake. I don't think we have to have a higher level of precision for ecological tax changes than we have for any other measure. What did we really know about the GST? We certainly knew it was unpopular, yet it was still brought in. To focus on the strategic question, if there's general agreement that ETR makes sense, that it's better than what we have now, that would go a long way to signalling what can be done.

Then I've made this final point: link the baseline study to the shifting of taxes, the subsidies. That is something I forgot to mention a few moments ago. It seems to me that once the baseline study is done, it would become the point-of-departure report if we're looking at an ETR strategy. Then you would have all the elements of the subsidies and taxes. One could create a second report, which would be some sort of draft or shadow budget, and just throw it out as a possible discussion document.

I'm afraid I don't have a more precise formula at this point; I'm looking for them.

Mr. Dillon: There are at least two issues I'd like to comment on briefly, though they're both very complex.

First, let may say something about the comment made by Mrs. Kraft Sloan with regard to a comparison of environmental performance and competitiveness. Sometimes there are those who make the claim that there are many countries that have both superior environmental performance and competitive industry. Sometimes it's hard to know whether we're talking about cause or effect. Put it in its simplest terms: do countries have higher environmental standards because they can afford to, or do they have higher environmental standards because they are more competitive? The work that's been done on this is not conclusive, and you can find a range of views including the conclusions of Michael Porter.

Having said that, I think it's clear that Canada does have superior performance in a number of environmental industries and with respect to a number of environmental factors. I've referred already to the OECD report that, as I said, did not get particularly positive reviews in the press, but actually points to a number of areas where Canada's environmental performance is in fact quite good.

We do have to keep it in the context that we are smaller than most of the countries we're usually compared with in terms of environmental performance, like the Europeans, Japan and the United States. We are not going to lead across a whole series of industries and environmental technologies, but clearly there are many instances in which we are on the leading edge, not just in terms of technology and environmental standards, but indeed in the way we develop environmental policy. So it's not quite as simple as suggesting certain countries are in the lead and certain others are falling behind.

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On the question of a carbon tax, which has been raised, that issue has been discussed for some time. I would like to point out that although the Europeans talk a great line on carbon tax, they've actually had a great deal of difficulty coming to an agreement on how they would design one on a pan-European basis.

Obviously a tax of that kind, if it's going to tax the use of a particular product based on its carbon content, may very well have an impact in terms of shifting consumption towards certain kinds of fuels that have less impact. That obviously would be a desirable goal.

In Canada particularly we have to think very carefully about the implications it would have, especially on a regional and sectoral basis. These are not considerations many other countries that are the leading proponents of a carbon tax really have to face.

Again, it comes down to an issue of how such a charge would actually be coordinated internationally. As Mr. Gale has pointed out, how would one compensate for some of the specific implications that would have for Canada?

The Chairman: Mr. Dillon, I'd like to intervene for a moment. At an international conference arranged by the Swiss government earlier this month on environmental taxes and comprehensive tax reform from an economic and financial viewpoint, the Norwegian chief economist spoke about green taxes. He produced substantial documentation on charge levels per tonne of CO2 emissions in the Scandinavian countries affecting charge levels per tonne for CO2 emissions. He indicated that as far as their terminology goes - and maybe it is a matter of terminology - there's quite an extensive use of carbon taxes in Scandinavian countries. I thought I would draw this to your attention. Are you aware of that?

Mr. Dillon: Yes, I am aware they call those carbon taxes. As I said, I'm not sure they've been nearly successful in establishing a European-wide carbon tax. A number of countries in Europe have been somewhat reluctant to pursue the idea of a European-wide carbon tax.

The Chairman: That's correct. Some are reluctant, but some have adopted it. In the case of Norway, a 2¢ tax is earmarked as a climate change tax. Some jurisdictions are moving in that respect.

Mr. Dillon: I also know the Danish government implemented a carbon tax but exempted a number of industries that would be most detrimentally affected by it. So there are a variety of things that go by the name of carbon tax and a variety of designs.

Mr. Gale: I'd like to make the point that there would be regional and equity implications in Canada, but they're all manageable. One can recycle revenues back to the affected parties or design systems whereby the affected parties are compensated.

I go back to the document I introduced at the beginning, which I prepared for the national round table last year, Environmental Taxation, Revenues, and Effectiveness: The Need for Principled Guidance. That's really the question. What kind of principled guidance would we have in place with a carbon tax that helps to deal with some of the transition costs for parties that are adversely affected?

I note also that in our green budget reform we have a study on the Swedish CO2 tax. In 1983 the Swedes raised $1.3 billion from that tax. Most people reckon the tax is modestly set. It's not a real behavioural change tax. Even more money could be raised if it was really a behavioural change tax.

As Mr. Dillon has pointed out, the Europeans have had some difficulties coming up with a European-wide tax. I don't think it will be too long before we actually see something sorted out.

Even in the U.S., I make reference to a popular new film entitled The American President. If you haven't seen it already, one of the interesting parts of the plot is that the president stakes his reputation on getting a 20% CO2 reduction approved. It makes for great viewing.

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Mr. Reed: It is fiction, though.

Mr. Gale: I'm not so sure how much fiction it is. It seemed to me it was well timed.

Mr. Reed: You mentioned a carbon tax. Perhaps you could tell me whose carbon. I burn wood. There are people in Europe who burn coal. Are they subject to carbon taxes too?

Mr. Gale: The carbon tax would apply to every product, every fossil fuel. It's differentiated according to the amount of carbon in the fuel, so you get varying rates.

Mr. Reed: So I'm able to avoid it because I happen to cut the wood on the farm, but my buddy down the road who sells 2,000 to 3,000 cords of wood in the winter would pay a carbon tax.

Mr. Gale: Yes. There are going to be gaps in the system. It's going to address the major users and the mainstream of how energy is supplied to the vast majority of people, which I think is what we're aiming at.

Mr. Reed: In terms of reducing carbon dioxide emissions and burning petroleum, I think it should go on the record that during the late 1970s when the consumption of oil was rising exponentially, in the United States the price, unlike in Canada, was allowed to go to world price. It succeeded in precipitating the biggest conservation effort that ever went on in North America. With the curve in consumption, there was more oil consumed in a decade than there had been up to that time since the discovery of oil. Once the price escalated, when we were doing the $50-a-barrel spot price on the Chicago exchange, the consumers themselves became their own conservationists and petroleum consumption declined immeasurably.

What I'm trying to get at is that the carrot approach is better than the stick approach. It's a very complex question, but I'll take it into one other endeavour, Inco and the refining of nickel in Sudbury. Inco has reduced its sulphur emissions by over 90% in the last 15 years. Obviously they haven't done it by being beaten over the head. They have done it with the carrot approach, being able to reinvest and so on. Don't you think that's the form of taxation we should follow?

The Chairman: Mr. Reed, they've done it the help of subsidies, with the help of public money both from the federal and provincial government.

Mr. Reed: That's a carrot, Mr. Chairman. That's a tax expenditure.

Mr. Gale: I would argue with regard to the Inco experience for more genuine cost internalization and less subsidy. Although Inco has been successful in many respects locally, it has also exported some of its problems elsewhere because of the higher chimney stacks. I won't get involved in that for the moment.

I want to go back to your example of U.S. gasoline prices stimulating a conservation measure. That may have been true for the very short term, but if they had escalated their taxes since the oil embargoes of 1972, we'd be in a much better situation with regard to affecting behaviour.

In the United States, in this document I have here from 1993, as you've probably seen in many other documents before you, the proportion of tax on a litre of gasoline is 29.6¢ compared to Canada, where it is 47.6¢. Of course, we all know the U.S. has the lowest-priced gasoline in the world.

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Yesterday we saw the American president relax the speed limits on the highways, which we can be more or less in favour of depending on our predisposition for speed. If that measure came maybe with a higher price gasoline, I think the trade-off would have been more acceptable.

I don't think what we saw in the U.S. over the last 20 years really has anything to do with conservation. I see it much more in terms of subsidizing industry unnecessarily.

Mr. Dillon: I have a couple of comments, firstly on the experience in the 1970s. I think the experience is quite clear, both in Canada and the United States, in terms of the impact those rapid escalations in oil prices had on conservation. Certainly in industry, most companies are not interested in spending more on energy than they really need to; they are constantly looking for ways to reduce energy consumption. That's not necessarily true of people who are driving their cars. There are, as you know, a variety of lifestyle choices. Nonetheless, even in the case of automobiles, people clearly opted for more fuel-efficient vehicles and the automobile industry, particularly in North America, had some difficulty responding to that change in demand.

The lessons are clear when there are very clear price signals. The kinds of taxes that are sometimes talked about may or may not send those same price signals to the consumers who are ultimately going to have to change their behaviour.

Also, very briefly on the carrot-and-stick approach, I happen to agree with Mr. Gale that a variety of approaches are clearly needed. I obviously have a slightly different view of the desirability of regulations versus economic instruments versus voluntary programs, but I would like to make the point that the environmental goal or objective has to be clear. He's right in the sense that none of these things work unless we all understand what the environmental goal is and it's agreed upon.

The only argument I would make is that regulations have proved they are not always effective in meeting that goal. We have numerous examples of both economic instruments - some of which I've already mentioned, like tradable emission schemes - and voluntary programs by industry in a variety of areas where they have proved that not only do they achieve environmental goals, but they also do them more quickly and more cheaply than a regulatory program.

The Chairman: We have now reached a new phase in the evolution of thinking on matters related to the environment. As you know, we are engaged here in a sustainable development exercise and are in search of ways of moving towards that general goal, which includes environmental as well as economic and social considerations. Somehow we have transformed the debate from a plane of environmental protection to a plane of sustainable development - or transcended the debate, if you like.

In the chapter on the choice of governing instrument, Mr. Gale, there is phrase that reads as follows, on which I would like you to expand for a moment:

Can you elaborate on that, and tell us to what extent what we are engaged in here today fits into that sentence?

Mr. Gale: What was the last sentence?

The Chairman: It's ``the design of budgets will change.'' It's from page 3, on the choice of governing instruments.

Mr. Gale: I'm struck that budgets are traditionally designed by.... I want to go back to an earlier point to answer the question, and that is what we mean by sustainability. I don't think sustainability is really so open-ended a concept that it can mean anything to everybody.

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One starting point is to sometimes put aside the social and the economic and start with the ecological. Yesterday we read that the ozone hole over Antarctica is twice the size that was anticipated by scientists earlier in the summer. Every day we see some other indicator that something is getting worse.

So I would tend to say go back to the World Conservation Strategy definition of 1980 and talk about sustainability as being concerned with maintaining essential ecological processes and life support systems, preserving genetic diversity and providing for the sustainable utilization of species and ecosystems. Use that as our starting point. If we are starting to threaten these three criteria in the sustainability framework, then we ought to be concerned.

My question, then, in terms of budget design, is to what extent Finance officials are aware of the ecological problem. Are Finance officials aware that environmental problems have fiscal origins, and are they aware that the budget is the place to resolve them? In the process of the design of a budget, it would seem to me Finance needs to have a much more integrated, multidisciplinary approach to dealing with these issues.

I've also looked at the whole issue of environmental assessment. Why isn't there an environmental assessment of the budget process? I think there are some fairly clear answers to that. An EA of the budget just sends shivers down the spines of so many people in government that it's largely deemed unthinkable, but I think a strategic EA process of the budget would make a lot of sense. You have to evaluate all the policy elements and all the program fields through some environmental assessment, and a budget requires some sort of strategic EA.

Whether you use those terms or not is sort of irrelevant. If ``environmental assessment'' of the budget is the wrong term to use, then don't use it. If it's an environmental analysis of the budget or a strategic or sustainability analysis of the budget, then use those terms. The point I've made in that chapter is that policy design is critical, and finding a mechanism to integrate environmental and ecological concerns in budget decisions is absolutely essential.

I've taken a stab at your question, Mr. Chair. Is there something more pointed I could do to help you?

The Chairman: You've both been very helpful to us today, in a variety of ways and from a variety of perspectives. I don't think we can ask you more, unless members wish to ask questions at this point. If there are none, then this will conclude our series of panels, which started last week, on the question of searching for fiscal disincentives to sound environmental practices.

We will work next week on a draft, and we hope that what this forum will produce will help in advancing the commonly held wish that we do move towards a sustainable future in line with environmental, economic and social values.

On behalf of my colleagues on this committee, I'd like to thank you for your participation and for your input.

Mr. Dillon: Thank you.

Mr. Gale: Thank you.

The Chairman: This meeting is now adjourned.

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