EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 28, 1995

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[English]

The Chairman: I apologize for pushing a little bit. We are running out of time, and for that reason I invite you people, in order to preserve as much as possible a meaningful question and answer period, to make the supreme sacrifice and the difficult effort to limit your introductory remarks to seven minutes and possibly not more than ten, if that can be achieved. I know it is very difficult, considering your subject-matter.

Who is ready to launch the panel? Mr. Cleland, are you ready to go? Would you like to introduce yourself first, and then give us the benefit of your overview, please.

Mr. Mike Cleland (Director General, Energy Policy Branch, Department of Natural Resources of Canada): Thank you very much, Mr. Chairman. Just before I introduce myself, I'm going to be speaking to a paper we've tabled with the clerk. I believe it has been distributed to members. With your agreement, I will walk you through the paper.

By way of introduction, my name is Mike Cleland. I am the director general of energy policy at Natural Resources Canada.

As I mentioned, what I wanted to do was present to you a paper NRCan has compiled based on work we have had under way for some months and which will be continuing into the future. Some of this work is at a very preliminary stage, but I still think what's there could or would provide you with useful grist for your deliberations.

I like to think that this work shows that we and the government are on the right track. If we don't have the answer yet, in terms of our analysis or the ultimate policy outcomes I believe the direction is clear.

The search for an appropriate framework for sustainable development is necessarily a difficult balancing act. An appropriate policy framework has to account for multiple objectives: the environment, investment, and economic development, social concerns, and, unavoidably in Canada, federal-provincial relations. Every step, even relatively simple ones such as the level playing field study to which I will refer in a minute, inevitably triggers a multitude of questions and competing perspectives.

Mr. Wappel (Scarborough West): Mr. Chairman, on a point of order, Mr. Cleland indicated that he was going to walk us through a document. I thought I had it. What's the title of it?

The Chairman: ``Submission to the Standing Committee on Natural Resources Canada''.

Mr. Wappel: I now have it, thank you.

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Mr. Cleland: Even the simplest of facts can occasion controversy, but as your committee has rightly assessed, it is critical in the first instance to get the basic facts out, so as to provide at least a common point of reference.

The main purpose of the paper is to try to set out the facts as we understand them. Even so simple a task, as will be clear as I proceed, is not without its controversial dimensions. Facts sometimes speak for themselves, but not always. In that case it is essential to understand what lies behind the facts, what are the assumptions and methodologies, what is included and what is left out.

There have been many numbers talked about on support to energy. Most have some basis in reality, but if one wishes to draw useful conclusions from the numbers it is essential that it be tranparent how they were derived.

I hope that many of the facts as I will present them will be uncontroversial, at least as to their validity if not their implications. Where they are not, I hope you will press me on the underlying assumptions, because I believe I can provide a picture of the world that, whether one agrees or not with the methodologies, can be fairly compared with other pictures that may be presented to you.

Your witnesses last week warned you against being overwhelmed by claims of complexity. That in my view was wise counsel. But there is a big difference between refusing to be overwhelmed by complexity and denying its existence. You have taken on a complex subject, but it can be taken apart, sometimes in very small bites. We at NRCan have taken some perhaps very small bites, which I wish to share with you today.

Turning to the paper, Mr. Chairman, if it's agreeable, I'll just go through it and point out the pages as we're going along.

On the first page of the paper, just to give you a sense of what our objective is, are three elements: the first is to clarify the magnitude and distribution of both direct and tax-based support to energy from the federal government; the second part deals with the level playing field study, which has become rather famous, I believe, around this table, and I will give you a brief overview of it; and finally, a concluding section, which talks about some of the work we are doing at NRCan in the direction of a baseline review or work we think would be supportive of such a review.

Turning to page 2, I'll try to go through this as briefly as I can, Mr. Chairman, but I think it's worth while to give members a sense of what's in the paper. Federal financial support to energy takes two forms....

The Chairman: Mr. Cleland, I thought you were well beyond.

Mr. Cleland: I could speed it up, if you wish. Let me go as quickly as I can. I am on page 2 of the paper.

On federal financial support to energy, there are two forms, as you're no doubt aware: one is direct grants and contributions in equity investments; the other one is incentives delivered through the tax system. You'll see there a definition of what we would regard as tax incentives. I'd like to come back to that, because it's vital in understanding the numbers.

Let me turn you to page 3, and really the gist of it is all on that table, and maybe I could just point out a few things there that are worth noting. One is the direction of the numbers. If you look, for example, at the megaprojects numbers, big numbers tend to get cited when you look at years like 1995-96. But if you look out, what you're seeing is the gradual becoming of history, if you will, of the megaprojects, consistent with the policy direction enunciated by Mr. Martin in his last budget. You also see other petroleum declining. If you want, at a later date we can get into what lies behind that. But many of those are statutory or contractual arrangements that are sunsetting over the coming years.

The nuclear number is steady. That's subject to consideration at this point by ministers as to what is the appropriate level of funding for AECL. Energy efficiency and alternative energy has gone up and down a little bit, but it is now on a steady track, in the order of $50 million a year.

Finally, there are some other energy expenditures I can take you through later.

Turning the page, page 4 about halfway down touches on the question of tax expenditures. Again, I mentioned I was going to talk about the definition. Tax expenditures represent the revenue forgone as a result of incentive -

The Chairman: We're all familiar with the definition, you can be assured.

Mr. Cleland: Yes.

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The important point there is that what amounts to a tax expenditure is not simply the deductions that are taken, but the difference between the tax deduction taken.... In the case of depreciation, it's the difference between the book depreciation and the depreciation taken for tax purposes, and special rates or incentives over and above the base system.

If you turn to page 6 you'll find a table that gives you the numbers. There are three components. One is measures of general applicability, which is to say measures that are available to all industries. The second one is repealed measures. These measures were available to the energy industry and were repealed in 1989 and 1990, I believe. They are declining as the accumulated tax pools resulting from those measures are used up. Finally, perhaps the component of most interest is the existing and continuing measures that are unique to the oil and gas and mining industries.

I can explain part of the underlying basis for the numbers, including what you see as negative numbers. The paper makes clear the basis for that calculation. What we have here are the years 1990 and 1991, which are the last years for which we have definitive data from Revenue Canada. So the total tax expenditures you see do bounce around, and 1991 almost certainly is not representative. Our best estimate is that $100 million to $150 million a year is a representative number of the whole structure of the tax system.

Going back to the direct expenditure numbers, what we see in total is tax expenditures of general applicability of about $100 million, between $100 and $150 million of indirect expenditures, and then direct expenditures - you've seen the breakdown of those - of about $500 million for 1997-1998. We can go back and look into what lies behind that if you wish.

Mr. Finlay (Oxford): What table are you looking at here?

Mr. Cleland: Table 2 looks at those two specific years, and as I said, one cannot generalize from them. So we went back and made a best estimate of what we think an ongoing number would be for tax expenditures specific to the oil and gas industry. We estimate that to be in the order of $100 to $150 million a year. So that $500 million isn't captured on a table.

The next section of the paper is entitled ``The Tax Treatment of Competing Energy Investments''. That is the level playing field study. It has been cited by witnesses before you and others, and it is in the public domain. We thought it was appropriate to bring it forward, and helpful for you to outline our approach. I want to stress the preliminary nature of the paper. It is still subject to a process of consultation. Not all of the people with whom we are consulting agree with the approach in all of its details, and some would say that some of the results do not fairly reflect the realities of financing their investments.

The conclusions are necessarily tentative, and it's important to note that many of them are not easily generalizable beyond a certain point. I hope you will look at this piece of work as indicative of what can be done in this area, as well as what some of the limitations of the analysis might be.

In the interests of time, I won't take you through the methodology in this paper. I think the paper speaks for itself. On page 9 you'll find a table that you may have seen, which is essentially what comes out of that analysis. I won't take you through the tentative conclusions, although we can come back to that if you wish. There is a rich amount of detail here that may not be fully apparent.

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As I mentioned, the work is preliminary and under a process of consultation. We intend to have further consultations and further refinement to take into account some of the problems that have been raised by various stakeholders. We hope to bring it to a conclusion early in the new year.

If you wish to get into the study in more detail, my colleague, Mr. McIlveen, who is responsible for it, is here with me and we could go into that. But I'm also prepared to answer questions.

Mr. Chairman, the last page of the paper is entitled ``Progress Towards a Baseline Review''. There are several elements of work that we intend to take further within NRCan. One is to try to broaden the level playing field concept. We think we could look at more examples of energy efficiency projects, for example, to get a better sense of what really lies behind the numbers.

We think we need to look at energy tax impacts on a comparative basis internationally. We have done some work on that, but we're also working with the OECD and IEA studies in this area. We think we need to examine the costs of environmental externalities. Our work clearly hasn't done that. You may hear from other witnesses who have have heard that this is a key piece of the puzzle. It's also one of the most difficult. It's conceptually difficult, it's methodological difficult and in many cases the data simply do not exist. That said, it's important to stress that we see that as an ongoing part of the work.

Finally, on developing indicators of sustainable development and energy, we don't think the final answer will emerge easily with respect to environmental externalities. We do think that if we can get some indicators that make sense, that show whether we're moving in the right direction, we will be making progress in the direction of sustainable development.

Mr. Chairman, many of the facts in this paper are straightforward and are matters of public record. Some involve interpretation, and I'd be happy to discuss that with you. All are subject to interpretation as to their importance for policy. I believe our efforts in NRCan in the search for a level playing field are constructive, but they are by no means the be all and end all. Contained within the numbers in our paper are any number of controversies. Nonetheless, I think we're moving in the right direction, and I hope this work will prove helpful to you in your deliberations.

Thank you.

The Chairman: Thank you, Mr. Cleland.

Ms Stephanie Cairns (Research Associate, Pembina Development Centre): I think this is a remarkable opportunity to provide input to the committee and have a more global overview of the work that's going on in this area. My comments are going to focus on very specific barriers that we've identified.

I haven't introduced myself, so I should start with that. I'm Stephanie Cairns, a research associate with the Pembina Institute, which is an environmental education and policy institute based in Drayton Valley, Alberta. Most of our work is focused on energy and environment policy work. We try to do independent analysis, but with an advocacy slant.

What I'm going to present today is focused on specific barriers that we have identified to improved energy efficiency and expanded renewable energy production in Canada. These barriers are found in the Income Tax Act. In cooperation with Barbara Campbell, who presented to you on the last panel, we recently completed a study for the national round table on environment and economy. I understand it was the first attempt to apply the framework methodology that was talked about in yesterday's panel to a specific issue area.

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While my comments are going to focus on the short term, I want to make some comments about the longer-term changes that are needed. In listening to the discussion this morning, I think it's important that we keep in mind the scale of changes that are required.

The context around energy issues is that world population is expected to double by the year 2050. It's forecast that this will lead to a quadrupling of the world energy demand. At the same time, international scientists in the IPCC are saying that industrialized countries will need to reduce their carbon dioxide output by up to 66%. The implications of this scenario are that a very radical reduction in energy inputs and material throughputs is needed in the long term.

Institutes such as the Wuppertal Institute in Germany are saying that we need to decrease the material and energy intensity of each unit of production by up to 90% over this timeframe in order to continue to meet basic human needs within ecological limits. So although the comments I'm making today are oriented toward timid first steps in this direction, we have to keep our eyes on the long-term radical changes that are needed.

The Guide to Green Government, which was mentioned yesterday, says that Natural Resources Canada will reorient energy policy from a traditional focus on supply to an increased emphasis on efficiency, alternative and renewable energy sources, the environment and sustainable development.

The Pembina Institute's research confirms the bias in the existing subsidy and tax incentives system against renewable energies and energy efficiency. There are clearly identifiable qualitative and quantitative differences between the tax treatment of the more environmentally desirable activities and conventional energy supply sources.

In looking in this policy area we have attempted to be conscious of the government's commitments to fiscal restraint. There are several approaches that you can take to looking at barriers. If the barrier is a favourable treatment toward a less environmentally desirable production activity, you can either eliminate that favourable treatment or you can extend that favourable treatment to other sectors. In the context of fiscal restraint, our recommendations emphasize eliminating the favourable treatment in order to reduce tax expenditures.

There's also a range of views on how interventionist and activist tax policy should be in promoting various social and economic goals. Our recommendations err on the conservative side of this debate in acknowledgement of the tax reform policies that started to be implemented in the late 1980s, tax reform policies that aim to eliminate or reduce tax incentives that represent a departure from a pure benchmark tax system. We see a number of areas in which to continue this reform in a manner that would reduce tax expenditures and eliminate tax incentives to the most polluting energy industries.

My comments today will be in three specific areas: first, a number of specific comments on tax reforms; second, specific comments on the changes to oil sands tax treatment that are presently being debated, which I consider to be a litmus test of the government's commitment to a more sustainable environmental and energy tax policy; third will be a couple of comments on direct subsidies that still exist.

In the interest of being brief, I'll quickly run over the main highlights of the barriers that we have identified in the tax treatment of energy efficiency and renewable alternative energies.

First, energy efficiency is a key policy area in light of the government's adopted voluntary approach to climate change. We're asking companies to take voluntary action, primarily in the area of increasing energy efficiency. Yet energy efficiency retrofits not only do not receive the same favourable tax treatment as energy supply investments, they are currently being penalized by the tax system. This is because their capital cost allowance rate is based on a productive life that is far in excess of the productive life of the specific assets.

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In contrast, energy supply investments actually provide an accelerated capital cost allowance or a proxy for that in the range of 30% to 100% deductibility. This means in essence that at the same time as we're asking the private sector to make energy efficiency investments, we're also penalizing them and they're in essence giving an interest-free loan to the government. This is simply untenable, given the necessary role of major energy efficiency improvements for climate change.

I'll cover the points on renewables very quickly because I understand that Jeff Passmore will talking about that later on. The second point is that income eligibility requirements for investors in renewable energies are substantially more restricted than those for fossil fuel energy supply options. This is a barrier to renewable energy developers in gaining access to capital.

My third point is that many environmentally desirable renewable or alternative forms of energy do not qualify for the accelerated capital cost allowance that currently exists for renewable energies. And that's because that CCA class is a subclass of the manufacturing capital cost allowance and therefore it's only including renewable or alternative forms of energy that would produce electricity for the manufacturing sector. That means that some very important environmentally desirable alternative forms of energy, for instance district heating or institutional or commercial co-generation activities, do not qualify for that CCA class.

Renewable energy companies do not have access to the flow-through shares that are available to the hydrocarbon and uranium sectors. This is a very important point in terms of attracting capital, which is one of the issues we think is key in trying to expand the renewable energy sector.

On tax treatment of conventional energy sources, we have looked at tax treatment in this area and we've been looking for areas where the existing tax treatment of hydrocarbon and uranium energy supply projects represents a departure from the benchmark tax system, which we're told is what we're moving toward under tax reform. The elimination of these preferential elements could create a more competitive and level playing field for attracting investment for all energy demand and supply options and it could free up tax expenditures for the expanded tax treatments we're recommending for renewable energy and energy efficiency.

These elements currently constitute clear business subsidies for some of the more polluting forms of energy supply.

I have to comment that the figures Mr. Cleland presented for Canadian exploration expense and Canadian development tax expenditures depart considerably from the finance estimates of that. The NRCan estimate that was tabled today was a tax expenditure of approximately $5 million for 1991. The equivalent Finance Canada estimate, which has been published, is $365 million. I would encourage you to look very closely at what the assumptions were in the differences between these two figures.

Related to tax treatment of conventional energy sources, successful oil and gas wells and certain energy-related mining development costs - by that I mean oil sands, coal mines and uranium mines - are treated under mining tax provisions. They usually aren't transparent when we look at energy-related tax expenditures because they're lumped in under the mining sector.

Certain energy-related mining development costs are now deductible at a 100% rate under the Canadian exploration expense. This is far in excess of the rate appropriate under a neutral tax system and is an incentive for increased incentive in those sectors in comparison to the incentives that are available for renewable energy or energy efficiency.

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The ability to reclassify up to $2 million of Canadian development expense as an exploration expense for the purpose of providing flow-through shares is a very clear example of an artificial tax incentive to direct capital investment to the hydrocarbon and uranium energy sectors.

Finally, for those energy activities that qualify for mining tax measures - oil sands, uranium and coal - the 100% rate of deduction that is provided for capital assets related to new mines and major expansions is CCA class 41.A and it's provided on top of the Canadian exploration expense and the Canadian development expense. This class 41.A is also combined with flow-through share provisions and this grants an extraordinary tax advantage to those sectors.

Since I'm talking about oil sands, I want to make what I think is a major point. The major litmus test I'll be looking for in the next budget, in terms of whether the government is serious about aligning economic and environmental signals, will be whether they are evaluating any new tax measures according to the types of principles we're talking about today. The most important decision the government will be making in this regard is whether to accept or reject the income tax changes that have been requested by the national oil sands task force.

The task force has proposed two changes to CCA class 41.A, which essentially would provide much more generous treatment of new mines and major expansions. I want to be absolutely clear that implementation in any form of either of these two recommendations would make a mockery of the government's stated purpose of pointing environmental and economic signals in the same direction for the following reasons. First, the oil sands expansion are a megaproject by any conceivable definition. The oil sands task force has gone to great lengths to try to state that they are not a megaproject, yet they are looking at as much as tripling production and a $21 billion to $25 billion investment. This is clearly a megaproject.

The tax changes being sought are clearly subsidies. Although the oil sands task force has said they're not seeking any government subsidies, they're asking for changes in federal tax treatment that would constitute a $700 million federal tax expenditure over a period of eight years. This is on top of tax treatment that is already much more generous than that provided to any other energy supply source.

The level playing field study under way by NRCan, which is a draft study, shows that the federal tax uplift already provided to oil sands as a percentage of capital costs is already 6 to 14 points higher for oil sands than for renewables, 13 or 14 points higher than for natural gas or conventional oil development, and 30 points higher than for an energy efficiency retrofit.

Finally, from the environmental perspective the oil sands represent the wrong energy vision for Canada. We're circulating an initial study by the Pembina Institute looking at the eco-efficiencies of oil sands compared to other fossil fuel developments. We hope to expand this and also look at alternative forms of energy. But even in comparison to other fossil fuel forms, upstream greenhouse gas emissions from the oil sands are four times higher than for conventional crude oil and two times higher than for natural gas per unit of energy; sulphur dioxide emissions are twelve times higher than for conventional oil and four times higher than for natural gas per unit of energy; and nitrogen oxides are three times higher than for conventional oil.

If you look at greenhouse gas emissions on a life cycle basis based on gasoline as an end use, the emissions from oil sands are 16% higher than from gasoline made from conventional crude and 50% higher than for emissions from natural gas vehicle fuels.

These comparisons are to other fossil fuels. In fact similar comparisons should be made to something such as lignocellulose-based ethanol.

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My last category of comments will relate to direct subsidies that continue to exist. We're very pleased with the government's commitment in October 1994 to have no involvement in new industrial megaprojects. We strongly support this commitment and the 1994 decision to withdraw from the Lloydminister upgrader project.

The second-largest remaining energy sector subsidy still on the books is the subsidy provided to Atomic Energy of Canada Ltd. The kind of scale of how much more money they're getting is clear in the NRCan table, which was just tabled, table 1 on their page 3. AECL receives approximately $172.5 million in 1995-96. Of this money approximately half is directed to the federal contribution towards the CANDU owners group agreement, which supports R and D for existing nuclear reactors. This seven-year agreement expires in 1997.

The 1996-97 budget presents an important window of opportunity to apply the same standards of reduced government subsidies to the nuclear industry as have been applied to many other industry sectors. We believe nuclear R and D has had more than 40 years of very general federal government support. No other industry sectors received that scale of R and D support over such a long term. It's simply time to treat the nuclear sector as other sectors are being treated.

In that light, we would also say we believe that status should apply to nuclear megaprojects abroad. The government is quite proud, and we've just congratulated it, of its commitment to have no new involvement in industrial megaprojects domestically. We believe this standard has to apply also in terms of subsidizing and financing foreign energy megaprojects.

The most disturbing example we have of this is the proposed CANDU sale, if you can call it that, to China. Canada is proposing to finance roughly two-thirds of this project, over $2 billion, from the Canada account of the Export Development Corporation, which is carried on the books of Foreign Affairs and International Trade. In other words, Canadian taxpayers are being forced to accept the risk of a $2 billion loan the private sector would consider too risky to take on.

Export development support such as this is an important form of subsidy. We suggest that needs to be looked at in terms of other sectors as well. But this particular nuclear example is a very visible example of that problem. That concludes my comments.

I do have a couple of comments about where more research is needed. I would be interested in more detail tax expenditure information for energy-related mining industries. I believe that because the oil and gas sector has dedicated tax measures, they have been exposed to much more comment on the types of tax expenditures to that sector.

In fact, the uranium industry, the oil sands and coal mining also get subsidies through the tax system and we should be looking at those. Those should be transparent to us. Similarly, information on renewable energy and alternative energy task expenditures should be transparent to us. I'll conclude there.

Mr. Eric Haites (Principal, Margaree Consultants): Mr. Chairman, honourable members, my name is Eric Haites. I am the president of Margaree Consultants Inc., based in Toronto. It's an environmental economics consulting firm.

My two fellow panel members have reported to you on research work they've done on fiscal disincentives related to the energy sector. I personally have not conducted such studies, so I don't have that sort of new information to provide to you. I will try briefly to put some of their information into a context I hope will be helpful.

First of all, just a bit of background on the energy system. Energy is an intermediate product. We do not use energy because we want to use energy. We want energy for the services, lighting, heating, telecommunications and so forth.

To provide those services we have a rather long-lived capital intensive infrastructure. We have the devices that convert the energy into the services we want - light bulbs, motors, automobiles and so forth. We have a rather extensive infrastructure devoted to gathering, processing, and transporting fuels to the point where they are used.

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That capital typically has a life of the order of 10 to 50 years. So when we make capital investments related to energy use, we're stuck with those investments for quite some time. Changing them before the end of the economic life of that equipment can be fairly costly. So we should be prudent about the capital investments we make and understand the environmental implications of those investments.

The information on environmental impacts associated with energy use indicates they are overwhelmingly at the point at which fuels are converted into useful forms of energy - electricity generation, the combustion of fossil fuels to produce electricity, to heat homes and to drive automobiles. The upstream environmental impacts at the wells, refineries and so forth are much smaller than the ongoing impacts at the point at which the fuels are converted into useful energy.

Those are some important points of context. The information I have seen on the fiscal disincentives suggests all the incentives provided to the different forms of energy are essentially all targeted at capital. They are not targeted at the point of use where the environmental impacts occur.

As well, there's relatively no disagreement on the fact that incentives exist to various forms of energy. The arguments are over the size of those incentives and the relative magnitude of those incentives across different energy forms.

We have heard references already today to different estimates of the size of the incentives available to energy. On an aggregate basis, they range from several hundred millions of dollars per year to perhaps many hundreds of millions of dollars per year, possibly even a billion. To put that in some context, over that wide range it is probably still less than 5% of the final spending on energy in Canada in a year. So the fiscal incentives are not huge in terms of our total spending on energy.

That is both good news and bad news. If you eliminated the incentives, you would not have much of a price increase, and assuming the environmental benefit occurred as a result of price changes it means we probably would not have much of an environmental benefit as a result of eliminating it.

On the other hand, those numbers are not trivial in terms of the financial fiscal restraints the government is operating under. So it suggests there's a possibility of reducing or eliminating them without creating significant disruption in the energy markets.

You can take that advice and you can make your own policy judgments, as Mr. Cleland says.

It is also clear that the energy supplies are provided with incentives, whereas energy conservation or energy efficiency measures are faced with financial disincentives. That is an important disparity. Whether or not there are also inequitable treatments between fossil fuels and renewable energy sources is more contentious. I don't know how to resolve that for you. However, I do think there's general agreement that energy efficiency measures are disadvantaged relative to energy supplies.

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There are two other areas you should be aware of. As I said, the fiscal disincentives do not appear to be huge in terms of total spending on energy. The direct expenditures related to energy - and Mr. Cleland has provided numbers on those - appear to be of the same order of magnitude as the fiscal disincentives. If you look at the tables he submitted to you today, we see rather substantial declines over the last number of years with specific commitments to reduce them further.

In the case of the direct expenditures, at least some of those expenditures are aimed at research and development of energy technologies and energy-efficient technologies. There are some public good aspects to those that are important. I personally would not advocate completely eliminating expenditures in support of the energy sector. However, they do need to be carefully scrutinized to see if we are, again, providing advantages to some energy sources over others and to energy supply in general relative to energy efficiency.

The last point I'd like to make is to come back to the fact I pointed out that the environmental impacts occur at the point of conversion of energy. The evidence we have suggests the existing environmental regulations are not sufficiently stringent to cause those environmental impacts to be reduced to the level that is most appropriate for society. Economists call that environmental externalities. Mr. Cleland referred to that.

In principle, those can be addressed in two ways. One is to estimate the value of them and to insist in some way that the dollar amounts of those externalities be reflected in the prices of the fuels. As Mr. Cleland pointed out, that is a rather difficult exercise. Coming up with the appropriate values and doing it fairly across all energy sources and all energy sources is a tricky exercise. That can be done conceptually as correct but it is difficult to do in practice.

The other approach is to tighten up the environmental regulations. We can do that either in terms of the conventional regulations we have - applying emissions standards and so forth to various uses - or by using more innovative approaches, such as capping emissions from all sources and allowing the sources to trade those emissions and thereby incorporate the costs of their impacts on society in the energy prices.

All the information I've seen on the values of externalities suggests they are certainly in excess of 5% of the costs of energy sources. The individual situations suggest they may be much higher and it's rarely the case they are estimated to be lower.

The area where you have the big impact on environment is in the externalities. That is not addressed by the fiscal disincentives or by the direct expenditures. That may be outside your terms of reference, but I would like to put that in the context for you.

That concludes my remarks. Thank you.

The Chairman: Thank you. We're all anxious to jump into the energy soup, so we'll start a quick round of questions beginning with Mr. Forseth, followed by Mr. Lincoln, Mr. Wappel, Mr. Adams and Mr. Finlay.

Mr. Forseth (New Westminster - Burnaby): Mr. Cleland, you talked about the numbers you presented. The significant thing that jumped out to me is the trend you talked about. I'd like you to expand a little bit about the trend. What is that trend? Can you explain it? Why is that trend happening and where is the policy pressure or whatever for that to be happening? You said we're moving in the right direction. Tell us why that is the right direction. At the end I picked up that there's a difference between you and Ms Cairns about some numbers, so who has the right numbers?

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Mr. Cleland: On the first one, I would refer you to page 3 of the paper. The most important trend is the decline of expenditures in the area of petroleum, relative to energy efficiency alternatives and renewables. What you're down to is megaprojects. Taking it right up to 1997-98, the last year of the existing fiscal framework, there is one final equity payment to Hibernia, and that's pretty much the last of the megaprojects.

As to other petroleum expenditures, you're seeing things like the deficiency payment to the Sarnia-Montreal pipeline playing out - that was from 1976 to 1996 - and expenditures on infrastructure support under the Canada-Newfoundland and Canada-Nova Scotia offshore agreements playing out.

What remains in those final years is some R and D support. Mr. Haites mentioned that. There is some ongoing R and D support related to oilsands, pipeline safety and dealing with things like tailings and so on, as well as some other minor things. Basically, the general trend is a significant decline in expenditures relative to petroleum.

Going back to the early nineties, you see a slight upward trend in the area of energy efficiency and renewables, and going out to the end of the fiscal framework, it's steady at around $50 million. That's what I meant by the trend, and it's really the relativities that I'm talking about. If it's a question of balance, I think the balance is shifting proportionately more toward efficiency, renewables and alternatives, and away from oil and gas. Is that the right balance? I'm not sure that's for me to judge, but as I said, it was really the direction.

In terms of the discrepancy in the numbers, I think that is an important point. Ms Cairns was correct when she said the Department of Finance estimates were considerably higher. We explain that on page 5 of the paper that I submitted. The difference goes back to my earlier comment, when I mentioned the question of the definition of tax expenditures. The published Department of Finance estimate recorded the actual deduction taken for Canadian exploration and development expense, but without accounting for the book depreciation.

It's normal practice in calculating tax expenditures for the tax expenditure to be defined as the difference between those, as opposed to the absolute amount of the deduction. This is something we came upon over the course of the last year.

We've been discussing this with the Department of Finance, which has agreed that our approach is conceptually more correct and more consistent with the treatment of other tax expenditures. They have agreed that in future it will be recorded as a memorandum item in the estimates, which is to say that it's still not clear what that will be until the data become available in future years. But that's the reason for the difference.

Mr. Forseth: I have one supplementary to that. Do you have any global figures comparing, say, the overall capital investment to the final return of profit to shareholders of the oil and gas sector? Can you compare it to the typical return on investment in automobile manufacturing or something else, to give some indication as to whether someone is on a gravy train or not?

Mr. Cleland: There are two aspects to that. I don't have numbers to put in front of you, but it is a well-known historical fact that the upstream oil and gas sector, and the downstream oil and gas sector for that matter, show a return on equity that is consistently and significantly under that for non-financial corporations. I recall that the gap is in the order of three to five percentage points over time.

.1145

Another useful comparison, perhaps a bit of a departure from your question, is the international comparison. Our work shows that the Canadian oil and gas tax regime is relatively competitive, but it's not excessively generous. It is competitive relative to the ``prospectivity'' of Canadian resources and the exploration risk faced by Canadian companies.

Ms Cairns: Can I comment? That was directed to both of us.

The Chairman: Yes, you're quite right.

Ms Cairns: On table 1, I would like to note my dismay that at the same time NRCan is stating that they are.... We know they are doing a major review of funding to AECL. The department is appearing in public and projecting the exact same expenditure over the next two years, and I think -

The Chairman: It should be left to the members to express that.

Ms Cairns: Well, I really have to express that.

The Chairman: You may want to deal with the question from Mr. Forseth.

Ms Cairns: Okay. I think this is a major issue around how that tax expenditure is assessed. The figures I was quoting aren't my own figures, they're from the Department of Finance. The introduction to that text clearly says that they are looking at tax expenditures, which they define as a departure from a benchmark tax system. I suspect there may be some differences in terms of what a benchmark tax system is, because there are different ways to look at it.

If what NRCan is saying is correct.... You're saying that under a benchmark tax system you would have a 100% write-off of successful wells, for instance, which I don't believe is accurate.

There are a lot of assumptions behind looking at those tax expenditures that need to be looked at in detail. This is the first time I've seen the NRCan figures, so I don't feel able to comment on them in great depth.

The Chairman: Thank you.

Mr. Lincoln (Lachine - Lac-Saint-Louis): I agree that it's a good thing that we are reducing our subsidies and grants to megaprojects and proportionately increasing our investment in energy efficiency and alternative energy. At the same time, I would like to subscribe to what Ms Cairns said. I hope we will look at AECL subsidies again and Candu reactor support. The hundreds of millions that we're investing - it seems to me that the time has come to look at this very seriously.

I have a lot of questions about your level playing field study. I'm glad you qualified it by saying that it's a draft report and is being questioned extensively. For instance, I was struck by this new term of ``uplift''. Suddenly we have this euphemism, ``uplift''. We don't talk about subsidies and grants, suddenly it's an ``uplift''. To the public at large I think it's a nice way of saying that we are subsidizing oil exploration or fossil fuels or something. I hope that in the revised version we call it what it is. I don't know what an ``uplift'' is.

Second, I don't see any reference there to the environment. I was struck by one of your remarks that the environment will be looked at as an ongoing feature of it. If you start calculating costs and don't calculate environmental impacts up front, I think the study has a big flaw. I don't see any comparison between jobs in the renewable energy sector and the fossil fuels sector.

We talk about capital all the time, as if capital is the key element. It seems to me that it's one of the elements. It seems to me that the whole comparison is based on the capital invested in a project. Capital is just one feature of the project. There should be other features - jobs and environment are two of the key features that I would suggest.

.1150

Are you going to upgrade this so-called level playing field study - it doesn't seem very level to me - with regard to renewable energy? As an environmentalist, I better tell you my bias. I find it not very level. Do you plan to upgrade this thing to include a comparison of the jobs question and the environmental question in terms of the overall balance? What is the timing of it? When you say it's an ongoing study, is it in a preliminary draft form now? What is the process for bringing it forward?

Mr. Cleland: The point is well taken in terms of what the study does and doesn't deal with. You're absolutely correct that it doesn't account for any number of social benefits or disbenefits that may lie behind the numbers or the kinds of projects that are identified.

I'm not sure I can give you a satisfactory answer to your last question on whether we will take into account those other factors. In principle we're going to try to do that, but in practice it gets murky very quickly.

Mr. Haites has mentioned the difficulty of calculating the environmental costs of one thing or another. They are very unclear. The ranges are extremely wide. So you could show the ranges and somehow bring that into the analysis. But as soon as you start to do that kind of thing it becomes less and less clear. It becomes more and more a matter of controversy.

This is a fairly limited slice through the world, where we made some simplifying assumptions about a number of ``representative'' projects. People we deal with have told us that our small oil or gas projects aren't really representative, that any number of other projects would be more representative.

Some of the folks who worry about wind energy have said that our project, the way we've put it here, doesn't accurately capture what a wind energy project should be about. We have two energy efficiency examples that show a negative uplift or negative subsidy. There are other kinds of energy efficiency projects that would show energy efficiency to get treatment pretty much the same as energy production.

We're trying to extend the range of projects. We're trying to get better assurance that the examples we've chosen are good ones, and are robust and sustainable in terms of a public debate. If we can get that, then I think we'll have a good agreed-upon base on which we can start adding some of the factors you've mentioned.

Our first task is to respond to what Mr. Martin called for in last year's budget. This is it, subject to the qualifications that I just mentioned. We won't be able to deal with all of the factors that you mentioned in time for this budget.

Mr. Lincoln: I can't help but be facetious, but when you mentioned an uplift or negative subsidy, I thought that would be ironic in itself. Maybe it should be uplifts and downslides or something, so that people would understand.

Mr. Haites mentioned that less than 5% of the total spending on energy in a year.... When you say less than 5% it sounds as if we should accept it, but even if you take his figures, we're still talking about $300 million in two years, which is a pretty good chunk of money.

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I wanted to question Ms Cairns in that regard, because she took part in the previous study on tax questions and economy and environment. I noticed in the report that when you came to examine the AECL subsidy there was one side that was for deleting the subsidy, another side very much for keeping the subsidy. All the arguments were given, pro and con, and finally nothing was done because there was a stalemate.

So as we go suggesting processes for the future, whether it's a baseline study or something else, what is your experience of the previous set-up, and how would you recommend that we break a stalemate when there are two sides and it gets nowhere?

Ms Cairns: I think the task force that was struck really jumped the gun in terms of establishing a multi-stakeholder task force in which people came in very much representing and fighting for the rights of their individual industries. That was set up before we had the facts collected and before the analysis was done. What it meant was that we spent a tremendous amount of time talking about stuff without being able to base it on more independent studies.

The baseline study, in some form or other, should have been done first, whether it was done only for a couple of sectors and then you talked about it or whether it was done on a more independent basis over a very long period of time, and then you got a multi-stakeholder group together.

The other problem was that we were appointed in early July and were asked to report by the end of November. The whole process was immediately politicized because we were asked to make recommendations for the budget. Although that was an important opportunity for us, which has led to some changes in the last budget, it also catapulted an issue that has had remarkably little analysis and debate into a very political forum. This meant that we weren't able to get down to some of the much more basic tasks of developing consensus, developing common views about what we were trying to do and actually collecting that information. It was immediately catapulted into a very political debate, and we were under very, very short time lines to get our work done. In fact we've been waiting for over a year now for the government's response to the report, yet we were under pressure to do our complete study within a three-month period.

I think before we get into that type of exercise again.... First of all, a multi-stakeholder forum is not the appropriate forum. I think you want much more independent experts looking at the issues. There are very strong vested interests on all sides in the issues that are being presented. I think you want a more independent analysis first, and I think you have to do a lot of work in developing your assumptions, your criteria, your goals, and collecting your data before you vault into looking at actual recommendations.

Mr. Lincoln: Thank you.

Mr. Wappel: Good morning, panelists.

Perhaps I could begin with a compliment to Ms Cairns. I thought this an excellent paper - just from the beginning, just from the title, ``Fiscal Disincentives and the Environment, Barriers to Sustainable Energy in Canada''. That's what we're talking about, and this paper actually comes up with some examples of fiscal disincentives and actually comes up with some recommendations. So I congratulate you for that. I don't agree with them all, but at least they're there, at least there's some identification, at least we can dig our teeth into something and get at some discussion.

One of the things I don't agree with is on page 7, where you're talking about - and I know it's a favourite topic of yours because you mention it numerous times - nuclear energy: ``This will more effectively and accurately reflect market preferences for energy technologies and reduce an environmentally harmful subsidy''. I'm assuming that you're assuming that nuclear energy is environmentally harmful, and that's a given. I don't agree with you. So what I'd like to concentrate on in this round is megaprojects.

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Table 1, Mr. Cleland, is a very interesting table. Although I see a very clear trend, it appears it's not the trend other people seem to see. I see a seven-year trend in megaprojects.

By the way, I learned just today that what we're really talking about is petroleum megaprojects. That's what we're talking about. My goodness, if we had a megaproject to send a satellite up above the equator and use some prism to focus the sun's energy on a number of solar energy panels across Canada, that would be a megaproject. I presume the environmental people wouldn't be too upset about that. So what we're really talking about is petroleum megaprojects.

We see a trend of a downsizing of $311 million in seven years on petroleum megaprojects. Where's that money going? It certainly isn't going into energy efficiency and alternative energy because that's only up $17 million. It certainly isn't going into ``other'' because that is down $13 million. I notice nothing is happening with nuclear because nuclear is pretty well on the flat line.

Obviously, the trend is to take the money out of megaprojects and pay down the debt. I have no problem with this in absolute terms but it certainly isn't being taken from petroleum megaprojects and put into energy efficiency and alternative energy. I make that comment.

What I'm getting at is that I guess it has been decided by somebody that the petroleum industry is not environmentally friendly. Is the government thinking about or working with anybody to come up with some megaprojects under the category of energy efficiency and alternative energy - wind, co-generation, solar - along those lines that might take us in a direction other than petroleum?

Mr. Haites, I believe you said that environmental impacts occur at the point of energy conversion. I believe that's a direct quote. I'm not sure I understand what you mean by that because I take it the point of conversion of coal is its burning but the extraction of coal from the ground certainly has environmental impact. Could you expand on that after I hear from Ms Cairns and Mr. Cleland on megaprojects and the comments I've made.

The Chairman: And possibly in a concise form.

Ms Cairns: It depends on how you conceive of a megaproject. You could conceive of an energy efficiency megaproject for Canada in which you would have a massive program of energy efficiency retrofits in buildings across the country. That isn't usually the way we think of megaprojects but if we want to be creative, we could do something like that. Certainly it's something that would be very much in keeping with various stated government policies around energy and environment. It would result in major cost savings for businesses across the country. It would result in a lot of new job creation. Retrofits are very job-intensive. Those could happen in every community across the country.

Mr. Wappel: Excuse me. I'm hoping we're here to be creative.

Ms Cairns: Yes. I would find that type of energy efficiency megaproject very exciting. However, usually when we start to talk about megaprojects, we're talking about massive technological, one-site types of activities.

I note in the States, for instance, that now less R and D funding is available for the military industry, a lot of the people who were working on the star wars type of technologies for the military industry are turning that same type of approach to more environmental megaprojects. It's fundamentally in contradiction with the type of small scale, human scale, flexible projects we consider more appropriate to more environmental energy policy, which is a more decentralized, modular approach to energy. There is no one source. It's a mix of different types of sources. They tend to be more small projects spread across the country, for instance.

.1205

Mr. Cleland: I have a few comments on that.

You're absolutely correct that the trend is away from energy megaprojects and generally away from expenditures on energy. As of the program review last year, a general trend is away from expenditures on a whole variety of aspects of the economy.

With that in mind, I wouldn't want to somehow leave the impression that the decline in expenditure on any energy megaproject is because someone had concluded that petroleum is necessarily environmentally unfriendly. There are environment impacts from the development of petroleum resources, and we all know about the environmental consequences of using petroleum.

But I think it's a more complex thing. It's a question of what is good economic policy in general, and whether you should be subsidizing production of lots of things. Upon reflection direct subsidies to those kinds of projects didn't seem to be sustainable in either economic or fiscal terms. Arguably this is something that certainly doesn't have environment disbenefits; it could be said to have some environmental benefits.

I think I agree with Ms Cairns that probably the best way to go is small projects at the margins, small things at the margins that are more consistent with really getting out people's creativity.

We've had massive investments, for example, in energy retrofits in the past back in the early 1980s where in one year we were spending up to about $400 million just for assistance to homeowners for insulation. That was a lot of money, and probably a good part of it went down the drain because it was a windfall to people who might very well have made those investments otherwise.

What we found is a more effective and certainly a more cost-effective way, which is working with people to find the benefits that are out there already, through things like our energy innovators program, through the kinds of things we're doing under the federal buildings initiative program in the federal government. That is finding better ways of financing those kinds of investments in a way that allows people then to take advantage of the stream of savings that come down the pipe.

And there are probably other examples of those sorts of options out there that don't involve large sums of money that as far as any of us can tell simply aren't available.

Mr. Haites: That quote is right, and you're right in stating that coal mining and oil and gas production have environmental impacts.

The point I wanted to make is that the information I have seen suggests that at the point of conversion, when you are burning coal to generate electricity or to make steel, the impacts by and large exceed those from the production and processing up to that point.

Mr. Wappel: Thank you.

The Chairman: Mr. Adams, please.

Mr. Adams (Peterborough): I would thank you all for your presentations.

I think one of the unfortunate things about hearings like this is that the charts and statistics contribute to our report but they never get into the record. For example, when this is on the Internet you miss out on a lot of the stuff we have before us but other people won't have.

Mr. Cleland, I'm looking at table 3. It seems to me this level playing field study is very important. I know there have been some comments on it, but given that we could think out all the assumptions and all that sort of thing, it would be terrific to have really good measures of the extent to which different types of energy are being supported by the tax system, and so on.

Now, in this particular one, these percentages are a measure of the way these different types of energy are at present supported by the tax system. Is that a way of putting it, or have I missed something?

Mr. Cleland: It is subject to going back and just looking at the methodology, but at one level -

Mr. Adams: There's a methodology.

Mr. Cleland: That's a fair statement.

Mr. Adams: And I notice it's a percentage of the capital costs, so it's not operating costs, how these things are run. For example, if it were oil sands, it's digging the hole and that kind of thing. Is that what it is?

I'm not sure what capital costs are. Perhaps the machinery? Are there other costs? That's what I'm trying to get at. Is it a measure of the subsidy of the total cost of energy from these sources?

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Mr. Cleland: It's calculated against capital, but in defining the projects we've tried to look at the overall cashflow from the project over its life. So the focus of this calculation is on the capital costs.

Mr. Adams: For example, you have small gas and small oil, which are supported at 6.8% and 7.6% respectively. Then we go on to offshore oil, which is supported at 17%; oil sands, which is supported at 21%; and so on.

How did you get 138% for ethanol? Where does the 38% go? Because once you've paid off 100%....

Mr. Cleland: Well, I suppose that's true. Mathematically it can go anywhere over 100%.

The reason is simply that is the amount relative to the amount of the capital costs. So the amount can be any percentage of uplift, if you will. That simply comes because of the size of the excise tax exemption relative to the scale of the investment.

Mr. Adams: Well, I'm not sure we can come back to that.

So we get to those that are negative. Building retrofit and solar wall, which are static things, show a negative effect. So do they pay us?

Mr. Cleland: Well, in a sense a lot of tax expenditures.... Certainly an accelerated capital cost allowance is in effect a deferred tax. A decelerated capital cost allowance, which is what you're effectively looking at here, is almost - I think it's a fair statement - an an advanced payment of tax in a sense.

The reason for that is simply that the actual book depreciation of these investments is considerably faster than the depreciation allowed under the income tax systems. But in a way they don't actually pay us. It's just a question of when the stream of payments takes place relative to how the investor treats it for book purposes.

Mr. Adams: Ms Cairns.

Ms Cairns: I would agree with that interpretation. The ethanol uplift is primarily due to the excise tax exemptions.

So in fact, as I understand the study - and the author is in the room, so perhaps he can explain it a bit more - the ethanol example is actually a bit of an exception. Most of the tax uplift in that case is not related to the direct capital cost investment. It's related to the excise tax exemption on the transportation fuel.

Mr. Adams: Yes, I notice the Canadian petroleum producers have provided us with material that has not been discussed. It has a table breaking out where this thing was calculated, and it does show that. But most of that comes from the federal excise tax and from the larger part, the provincial motor fuel tax.

Ms Cairns: That excise tax exemption is also available to propane and natural gas. So I wouldn't want to leave the impression that it's exclusively available to ethanol.

Mr. Adams: Where is nuclear in this? Is it out simply because it was decided to leave it out?

Mr. Cleland: In a sense, yes. We made an arbitrary selection of projects.

Mr. Adams: So if it were, what would you guess its percentage would be? A ballpark figure will do. Would it be 5% or 100%?

Mr. Cleland: The difficulty in this case is that the nuclear utilities in Canada are all crown corporations, and they're not taxable. That's the best reason for having left out nuclear. So I don't know what the ballpark figure would be.

Mr. Adams: Ms Cairns, would you care to...?

A voice: In the hundreds.

Mr. Adams: That's why I asked. Would it be 5% to 100%?

Ms Cairns: I don't think there's any way you can guesstimate because most of the utilities are crown corporations further up the nuclear chain. For instance, AECL is a crown corporation, and essentially most of the nuclear fuel cycle is sheltered from taxation, period. That applies to everything except the uranium mine stage.

.1215

You might start to get a bit of an estimate by looking at the impact on say Alberta provincial utilities from the removal in the last budget of the Public Utilities Income Tax Transfer Act. It essentially made the provincial utilities that are privately owned pay tax, and they didn't before. It would start to give you an index of it, although obviously the cost for a coal-based utility would be very different from the cost for Ontario Hydro, for instance.

The Chairman: Mr. Finlay please.

Mr. Finlay: This is a very interesting session. I'm pleased with the information you've left with us.

Mr. Cleland, you started with something I wrote down that I thought was quite significant. You said we should refuse to be overwhelmed by complexity, but that does not mean it does not exist.

I think that's a good comment. However, there are some things perhaps we're missing, which are simple. Ms Cairns said the world population is expected to double by the year 2050, and the energy supply to quadruple -

Ms Cairns: Energy demand.

Mr. Finlay: - energy demand to quadruple, and yet our carbon dioxide output must be reduced by 60%. Then Mr. Haites has pointed out that the environmental impacts of energy occur mostly where it is used, where it is transformed into locomotion, heat or whatever, for example, electricity to light a light bulb. In all our thinking about this and the matter of energy and energy conservation, I wonder whether we keep those things in mind.

When I first got interested in energy conservation and conservation generally, one of the things I could never understand in the marketplace was that the more electricity you used, the cheaper it got, the less you paid for it. It seems to me one of the best curbs on the overuse of energy....

In the latest figures of which I am aware, we as Canadians are identified as the world's greatest users of energy per capita. Are we ever going to sort that out? I know you don't have control of that; I suppose it's Quebec Hydro and Ontario Hydro. But the more hydro we use, the less they pay for it. I pay more for lighting my house than they pay for smelting aluminum. I wonder whether we shouldn't keep that in mind.

Mr. Haites, you also left us with three points at the end. You said there are some ways we can handle it. Energy efficiency measures are disadvantaged relative to energy supply incentives. The cost of externalities may need to be included in the cost of fuels, or we need to tighten up the regulations we have regarding emissions, to cap them or supply incentives for energy conservation. Those seem to me to be three things we might do. We might do all of them, some of them, or none of them.

I wonder whether the panel would comment on what I've said, and perhaps each give me an example of an activity or energy conservation measure we could encourage through the federal fiscal system.

Ms Cairns: Somebody put me on the spot first. Well, obviously energy is a split jurisdiction in the country, so a lot of issues related to provincial utility rates, for instance, cannot be influenced within federal grounds.

In the long run - my comments today have been aimed mainly at the short run - there's no doubt in my mind that you won't be able to use regulations to control the full extent of environmental issues that need to be addressed in the energy sector. In the long term some form of environmental tax is the best way to deal with the vast range of energy issues raised in that sector.

It's very interesting that there is a lot more work starting to happen. I'm looking at multiple benefits, from seeking action, for instance, on energy efficiency. We're finding that although they've been discussed more in relation to carbon dioxide emissions in fact they will also yield major benefits in reducing sulphur dioxide emissions and NOx and VOCs emissions and urban smog problems.

.1220

So if we can start to look, in the long run, at issues such as a carbon tax in Canada, that's obviously considered to be quite an explosive issue. There hasn't been a good debate on this issue in Canada yet. But hearkening back to the discussion yesterday, I think that an in-depth discussion on carbon tax that looks at where you could reduce other taxes, for instance payroll taxes.... If you were to introduce something like a carbon tax, it would create an atmosphere where you could have winners as well as the perceived losers in the political debate around that issue.

As in any economic instrument, the key issue is how you design an instrument like that, and there are policy proposals on the table for designing a carbon tax in a way that would recycle revenue back to individual provinces, for instance.

Another very interesting example I would point you toward is in the green budget book. There is a very interesting example around the Swedish NOx and VOCs emission fee rebate charge, which is a very, very innovative economic instrument, aimed at providing both a carrot and a stick to increase production efficiencies in the utilities sector in Sweden.

The Chairman: Mr. Cleland.

Mr. Cleland: As a general proposition, I think you make a very good point. The issue is enormous, the issue is very long term, and we're really working here at the margins, but I think that's probably what we have available to us is to do that and take the steps we can take that are reasonably clear.

I would not want to try to give you a list of the things you should do or you should propose; indeed, I think it would be inappropriate for me to recommend them. But I guess I draw your attention to the work we've done on the level playing field. Despite my cautions about not over-generalizing, and despite the fact that you will or would, if you pursued it further with others, find that there are any number of people who would say we haven't got it quite right, it does appear to reveal some things that are worth thinking about: the effect on certain kinds of deductions with respect to tax-limited investors - in other words, investors who are not paying taxes and who are unable to flow those benefits out to other investors.

We've talked about the energy efficiency side of it. I caution you there. What those numbers say is that investments in building retrofits, whether energy efficient or not, are disadvantated under our calculation. So you need to think about that. But on the face of it, there does appear to be what you could call an inequity in the system. I guess I add as well that if we look at other energy efficient investments, such as equipment in a manufacturing process, you'd get a very different result. So you need to be careful with the generalization.

I guess my sense is that this sort of analysis can be taken further by others, using their own assumptions, and it will reveal things that are of use.

The Chairman: Mr. Haites.

Mr. Haites: I think my fellow panelists have stolen the good ideas. Personally, I do not feel we have the fiscal situation to advocate incentives for particular measures, so my approach would be to suggest to you that you reduce the incentives that currently exist in the system and do so in a way that treats energy efficiency and the various energy supply options equitably.

I think Ms Cairns made some points that are very attractive to me. In the longer-term, restructuring the tax system so that we tax the things that are bad for the environment instead of things that are good for the economy, such as labour and capital, is a much more appropriate basis for our tax system. Making that transition is going to be very difficult, but I think it can yield both economic and environmental benefits if it's done carefully.

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The Chairman: Thank you.

A couple of questions from here and then we move to the next witnesses. One has to do, Mr. Cleland, with table 2, on tax expenditures. It goes back to the line of questions advanced by Mr. Forseth earlier. For 1991 you show your total tax expenditures of $6 million. In the Government of Canada tax expenditure report the figure for that same year amounts to $283 million. In light of your reply, in which you seem to attribute the discrepancies to book expenditures, are you sure that is all book expenditures? How do you attribute this enormous gap between the two figures?

Mr. Cleland: Mr. Chairman, the simple answer is that it is, as I understand it, attributable to that difference. My colleagues from the Department of Finance could probably explain to you in more detail precisely how it works. But I do understand the number they've reported was simply the deduction number, without accounting for the book depreciation. We have discussed this with them and they have agreed, as I said, that our methodology is conceptually more correct, and consistent with the way other sectors are treated.

The Chairman: Thank you.

I move now to table 1. Table 1 in a way is a policy declaration on the part of EnerCan. First of all, on the question of nuclear, are you sure the nuclear agreement goes into 1997-98 with that additional $177 million for that year? I'm asking this question because in a letter from the minister to me in October, she indicated the agreement with AECL comes to an end in the preceding fiscal year. Therefore the question is, are you sure that $177 million is the amount that is still committed?

Mr. Cleland: Is this the agreement with the Candu owner's group? Is that the agreement you have in mind?

The Chairman: With AECL.

Mr. Cleland: The numbers here are the numbers as reported in the main estimates. The numbers are indeed under review by ministers.

The Chairman: You indicated that earlier.

Mr. Cleland: Yes.

The Chairman: I'm only asking you whether you're sure the agreement commits your department into fiscal year 1997-98.

Mr. Cleland: Again, if it's the one with the utilities, I believe you're correct that the year is one year sooner.

The Chairman: Are you discussing the possibility of diverting those funds into energy efficiency and alternative energies?

Mr. Cleland: We're not. I can't speak for what ministers might choose to do in the event they reduce R and D expenditures at AECL, but no, we are not discussing that at present.

The Chairman: Don't you think you ought to examine that possibility?

Mr. Clelland: At one level I guess I would have to say yes. In these days any government department that could be looking at the possibility of finding new program money to do things that are clearly a priority would no doubt be happy to do so. I suspect, though, ministers may have other destinations for any savings they can find.

The Chairman: I am looking now at the column for 1995-96. If you add up megaprojects and other petroleum...it adds up to $325 million, give or take something. That amounts to 65% of the total budget of EnerCan being devoted to fossil fuels. With this kind of political division of your resources, do you think you can achieve the commitment by Canada to stabilization of carbon dioxide emissions by the year 2000?

Mr. Cleland: I guess there are two questions here. One is that you focus on the year 1995-96, and the numbers as you've quoted them are correct. All I would add is that it's important to appreciate that a fair part of those numbers in 1995-96 are either contractual or statutory payments, to which we are obligated and which are sunsetting over the next two or three years. So that I think says something about what will be the shape of energy expenditures out towards the end of the century.

Do these numbers, or for that matter the numbers as I might interpret them, say we can or can't meet the goal of stabilization? There are too many other factors in play. I would say that these are, if you will, a relatively small part of the overall equation. I'll take Mr. Haites' 5% number just out of...maybe it's 2%, I don't know. Clearly, there is a lot that would need to be done to get there.

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The Chairman: Are you telling us that your conclusion would be that budgetary policies do not have a substantial role to play in achieving our commitment on carbon dioxide emissions?

Mr. Cleland: No, I wouldn't say that. They do potentially, that would be quite clear.

The Chairman: Thank you very much.

We thank you all. Time is a terrible tyrant today. We still have two very important witnesses. We hope you can stay until the end, perhaps by taking a seat in the front rows.

I would please ask Mr. Jeff Passmore and Mr. Landry to give us a hand in concluding this very important session.

Mr. Passmore, would you like to start your presentation? Please start and give us the benefit of your wisdom in a concise manner.

Mr. Jeff Passmore (Vice-chair, Independent Power Producers' Society of Ontario): Mr. Chairman, Len Landry and I have never met, so we're just saying hello now. I'll go first, not that we've discussed it, but at the chairman's request.

Thank you for the opportunity to appear. My name is Jeff Passmore. I'm the vice-chair of the Independent Power Producers' Society of Ontario, the president-elect of the Canadian Wind Energy Association, and I sit on the energy committee of the Ontario Chamber of Commerce. I'm the past-president of the Ottawa chapter of the International Association for Energy Economics.

The comments today are my own. However, I did talk in preparing my presentation for this morning with tax lawyers, financiers, developers and academics who are all active in the area of renewable energy, new energy source technologies and the subject of fiscal disincentives in the environment.

The Chairman: In view of the late hour, could you compress your comments into ten minutes, please?

Mr. Passmore: Absolutely.

I've put in front of the committee a number of pages. I'll skip through these quite quickly.

My recommendations in fact are quite small. Indeed, they're not even original because both appear in the study ``Economic Instruments and Disincentives to Sound Environmental Practices''. Unfortunately, although both of them appear in that, this document is now a year old and I'm here before you again today to repeat the same types of requests. That may say something about my view of studies in general and the role they might have to play in the sort of work this committee is doing - at least in the short term.

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I am going to assume there's no doubt that this committee is aware of the fact that the new energy source technology industry is there and ready to deliver. The technologies are proven. I'm further going to assume that sustainable development has been defined by this panel as it was yesterday by the chair, and I think by Mr. Wappel, as basically being the Liberal government has indicated that sustainable development is a goal.

We have targets in the form of reducing greenhouse gas emissions to 1990 levels by the year 2000. It's my contention that under the current scenario those targets will not be met. Direct government action is going to be required if we are to achieve our targets in the context of sustainable development.

Price targets need to be set to reflect socially optimal costs. We'll talk in a minute or two, or perhaps during the questions, about what I mean by socially optimal costs.

On the question of the level playing field, assuming that sustainable development is your goal, a level playing field will not necessarily achieve that goal. I think this is an important point. There is a cost to maintaining a clean environment, which has to be recognized. If we end up with just a fiscally level playing field, the goal of sustainable development is being given a value of zero. In other words, everybody's equal, so sustainable development has no priority. Achieving sustainable development and environmental protection will require direct government action showing the preference for those types of measures that achieve the goal.

We need to decide what value we want to give our goal and then proceed with the measures that reflect that value. So settle on a value first. It doesn't matter whether it's $100 million a year, nominal or whatever, but settle on a value and settle on what fiscal approach you want to use to deliver that value.

There's been some discussion this morning about the NRCan level playing field analysis. Again, I think we probably aren't going to have time to get into the details. I have included some correspondence about this in your packages.

From the point of view of the application of the income tax rules, let me simply say that the preliminary conclusions of the NRCan level playing field study are erroneous with respect to the fact that it suggests the playing field is essentially level, that there's no bias in favour of conventional energy. This will get me to the recommendation I am going to make.

Let me just say I am a bit confused by some of the things in the level playing field study. When it talks about things like the energy property rule and whether or not it applies, this will have an effect on the conclusions of the level playing field study. The first question any investor doing its due diligence will ask is whether the specified energy property rule applies. Of course, by law, it does.

The conclusions cannot be really accepted as they stand now, and we're going to have to do some work with NRCan to improve the understanding.

At the risk of telling you what you already know, I outline then some options on the fiscal front. If you're going to continue to use the income tax system to achieve energy environment goals - and by the way, academic purists will tell you that you should not be using the income tax system - then I have two suggestions. They go from a simple one to a more complex one.

The simple one is to provide flow-through opportunity for renewable energy projects from all types of potential investors, the same way we now provide this to the petroleum sector. This seems to us in the renewable energy sector as a no-brainer. Essentially, it is in the ``Economic Instruments and Disincentives to Sound Environmental Practices'' from a year ago. There seems to be, on its face, intuitively, no reason why investors in the renewable energy sector shouldn't be able to source capital from venture capitalist pension funds, insurance firms, any other business sector in the same fashion the petroleum sector is allowed to do.

The second way of using the tax system would be to tax for disincentives a carbon tax. That was raised as a provocative issue by Ms Cairns a few moments ago. The fact that carbon tax is not politically palatable I would suggest is in conflict with the goal of sustainable development. Perhaps a way to overcome this is to introduce a carbon tax only at the time when an equivalent amount of tax is being removed elsewhere.

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There are problems with using the income tax system, such as lack of transparency and leakage and abuse. I would suggest that there is probably no more leakage and abuse than there would be with grant programs.

Similarly, while complicated, the issue of transparency can be dealt with by integrating tax expenditures more completely into the budget process. I realize that's started, but it could be more comprehensive even than it is.

So the second option then is not to use the income tax system to achieve your energy environment goals. If the price is wrong, which from an environmental point of view it is, the way to correct it is not to use the income tax system but rather to use direct grants and loans to the types of projects that move you towards your political goals. This is very transparent, so it has that advantage.

The second option is to use direct charges specific to any activity, or taxes at the source of the problem. In other words, use taxes other than the income tax system to achieve full-cost pricing.

Taxes at the gas pump, for example, send the right signal to the consumer. The message here is not to tell people they can't drive their vehicles and can't drive gas-guzzling vehicles. The message here is to make it so expensive that people want to drive vehicles that are fuel-efficient.

Under this scenario, governments can decide what their goals are and then offer grants and loans to the preferred projects. Perhaps a renewable energy bank could be established, which would loan funds to these projects that would be repayable on a no-interest basis. Future grants would depend on performance.

There are problems with that option. Often, for example, my own experience tells me that the public service has a difficult time determining the difference between good projects and bad projects. There is a lot of paperwork involved, but I think it could be overcome if the projects were specified at the political level.

I have a short-term recommendation, which is that in the 1996 budget the government should go with the first option. This is outlined in an attachment you have and is a presentation that will be submitted to the Department of Finance as a pre-budget 1996 submission. By the way, the same pre-budget submission was made last year prior to the 1995 budget, and it was not acted upon. We are making a similar submission again in the 1996 pre-budget submission to permit flow-through to the renewable energy sector, in the same way as it is permitted to the petroleum sector.

Other recommendations include green power procurement. There is an opportunity and need for federal leadership in this domain, just as the federal government led the way in paper recycling. So in its role as an energy consumer it can lead the request from customers that a certain percentage of their power consumption be green. This is already somewhat under way at Natural Resources Canada; they are exploring this issue. This committee could lend its support to that sort of initiative. There are some attachments in your material for that.

The subject of social costing perhaps gets me a little bit into the question of the baseline study that is going to be done. I want to make sure I can support the study. I believe I can as long as there is lots of input from outside the federal bureaucracy. We are currently in the process of having just taken one small slice, which is the level playing field study, and already there is a great deal of inability to come to an agreement. I think a total of seven or eight letters at last count have been written by the industry in response to just a simple thing like whether or not there is a level playing field on the issue of flow-through shares.

The question of social costing is far more complex than that. I refer you to the last page of my attachment, which gives you an indication of the sorts of things the panellists were talking about prior to me. You have there four different studies that have been done, comparing on a cents per kilowatt-hour basis the results of the impacts of fossil, nuclear, and renewables on the environment. You can see that they all differ by huge orders of magnitude.

So policy-makers like yourself are left with the question, what are we supposed to do with this? Either the numbers are so low that they are well within the uncertainty band we would deal with in our normal planning process anyway, or the numbers are so high that they would cause great shock and we as politicians simply would never be able to implement them or do anything with them, otherwise we would not be re-elected.

I think what you need to do is set targets, and having set targets see how the marketplace reacts, see what the environmental implications of those targets are, and adjust them as you move through the process.

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I feel as though I've given you a rather hurried presentation, Mr. Chairman, but I'm trying to live within your ten minutes.

My conclusion is that you correct the price signals through taxes and charges, that you provide access to capital through extended flow-through on a par with the petroleum sector, and that you open the market to green power delivery through federal green power procurement.

The Chairman: Than you, Mr. Passmore.

[Translation]

Mr. Landry, you have the floor.

[English]

Mr. Len Landry (Vice-President, Fiscal Policy and Corporate Services, Canadian Association of Petroleum Producers): The Canadian Association of Petroleum Producers represents 190 petroleum-producing companies in Canada, which account for about 95% of all oil and gas produced in Canada.

I would like to thank you, Mr. Chairman and the committee, for allowing us a few moments this morning to address you. You have before you, I think, a package. I'm going to flip through them rather quickly and make a point on each one, and I'd ask you to follow along with me.

The industry employs about 70,000 Canadians directly in the industry, which has a spin-off to other employment of about another 110,000 Canadians for a total of just about 190,000. The industry spends about $22.5 billion on various activities in Canada, which generally goes to employment and jobs for Canadians and purchases of Canadian-produced inputs.

The industry pays anywhere in the order of $3.5 billion to $5.5 billion a year to governments in Canada, the majority going to the....

Mr. Adams: I just wondered what upstream meant.

Mr. Landry: Upstream is the producing end, not the refining sector, everything up to getting the oil and gas out of the ground and into a pipe.

Mr. Adams: Thank you.

Mr. Landry: We provide about $5.5 billion a year to governments, of which the majority goes to the provinces, which are the owners of the resources and therefore get it via royalties and the sales of the land access rights. In our upstream cashflow and investments we reinvest in the order of 100% of all cashflow each year. In 1994 it was 122% of cashflow. Our investments are about $13.2 billion a year, which is 17% of the total Canadian non-residential investment.

The industry is also very important to Canada in that it provides two-thirds of the Canadian energy sources.

The Chairman: I would be the first to agree with you that what you're saying is extremely important, but could you please keep in mind that the interest of this committee and our work today is on the question of baseline studies and sustainability of our resources. Perhaps you may want to select your charts accordingly. Thank you.

Mr. Landry: Yes. I just want to point out that the industry provides significant benefits to Canadians and is a very significant, integral part of the Canadian economy.

If you want, we could skip to the trade balance. The industry provides in the order of $15 billion of exports, a net balance of $10.6 billion. If it weren't for these energy exports, Canada could be in a deficit trade balance in the order of $5 billion.

Where does the industry stand at the current moment in an economic sense? The crude oil reserves-to-production ratio has declined significantly in the last few years. Even though there's been an enormous level of reinvestment and exploration activity, the levels of reserves in both oil and gas are declining relative to production. The point is that this is a find policy the Government of Canada took to open up markets to provide a more stable marketplace for the industry, but it requires that the industry continuously reinvest at high levels to replace the production that's used up.

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The upstream petroleum sector is, as was raised early today, not in an extremely profitable position. We have rates of returns in the order of 2% to 4% a year, which is substantially below the non-financial sector.

The point of today's meeting is the role of the current tax system in environmental activities. I would wish to comment that the tax system is not the key determinant of the petroleum sector's decisions on environmental activities. The two key determinants are sound business practices and compliance with regulatory requirements.

The environmental community has been very effective and successful in raising the consciousness of Canadians about environmental impacts. Therefore, it is only sound business practice that the petroleum sector be aware of this, and take action in order not to turn off our customers, not to turn away our customers. Therefore, we focus on two mainstreams of activity: the voluntary challenge to reduce emissions, and new technologies.

Before you is a demonstration of the great participation of the petroleum sector in the greenhouse gas emissions voluntary challenge in reductions. We point out that we've had some successes already in the order of reducing carbon dioxide equivalent emissions by 3.62 million tonnes per year.

On the side of technology, there is a picture there of the various drilling forms. I ask you to focus on the one called ``slant hole and horizontal''. Either of those two technologies allow for drilling of multiple wells from a single pad so that only a single site surface is disrupted. You can therefore drill under bodies of water or on very environmentally sensitive pieces of land without disruption to them. The horizontal technology allows you to drill often from a site two miles from where you're actually going to be targeting and getting the oil.

This technology, horizontal drilling, has increased rapidly in Canada, particularly in the province of Saskatchewan, which has a favourable royalty system that is encouraging people to use that technology.

Another technology, over here on the user side, is a Herminston generating plant; it's a new technology where you move the electrical generation into small sites local to the community - no longer these huge single electrical generating sites. You can then be more effective by way of using gas turbines. In this example, they are able to get the heat that's wasted from the initial gas turbine to run another steam turbine that produces more electricity, and then the steam is used in a potato processing plant in town in that community, which again adds to the benefit to the community.

The emissions from this type of a plant are shown in the next picture. They are considerably lower than in other electrical generating capacities.

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I turn now to the level playing field study and whether the tax system favours hydrocarbon production. Mike Cleland went through this a bit earlier.

I would point out to you that although there may be some question of whether NRCan has chosen exactly the right plays and projects to test here, on the oil and gas side you wouldn't see significant differences in the ordering or where it fits in the system if you did use other projects.

There are some interesting things. For example, the resource allowance shows that there is a bump-up, an uplift from the tax system, but in fact for the total industry it's the opposite. The industry pays more tax than if royalties were deductible.

In conclusion, I skip to the very last one, which is a brief study that we had DRI/McGraw-Hill do for us. If we change the Canadian exploration expense to what the benchmark or normalized treatment in the finance tax expenditures booklet is - which is where you deduct fully unsuccessful exploration efforts and you capitalize successful efforts - what the model told us was in the short run the federal government would gain some revenue but in the long run it would lose and other governments would lose throughout the period. Our GDP would be down and we would lose some employment.

Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Landry.

Mr. Steckle (Huron - Bruce): I would direct a couple of short questions to you, Mr. Passmore.

On the issue of procurement of capital money, you mentioned going to the insurance companies and perhaps even going to pension funds for moneys. How successful has the private industry been in being able to procure funds from those kinds of sources?

Mr. Passmore: The point I was trying to make is that the way that class 43 is right now, if you're doing a renewable energy project and trying to raise capital you are limited in the companies you can go to. They have to be in the energy sector.

The proposal we're making is that we would like to see the class changed to permit would-be developers in the renewable energy sector to have access to those sorts of things I listed: pension funds, insurance companies, venture capitalists and so on. As it stands right now, basically we are expected to go to the energy sector, which is essentially our competitors, to raise capital for renewable energy investments.

A good example is the 20-megawatt wind farm that is currently functioning in Pincher Creek in southwestern Alberta. It took two and a half years shopping that project around Calgary and then finally we found an investor in Toronto who could take advantage of class 34, which was a better class than class 43. It still took us two and a half years to find an investor.

The specified energy property rule does apply, and therefore there is a bias against those developers in the renewable energy sector who are looking for money.

Mr. Steckle: That's interesting. Wind power is something that's coming very close to my own riding. As a matter of fact, in my riding people are working on the development and the production of rotor blades for Tacke Windpower of Germany.

Mr. Passmore: Yes, I've seen that machine.

Mr. Steckle: Do you feel it's the responsibility of the producer or the consumer to ensure sustainability in the energy sector, or both? How do you feel about that?

If I might ask a second component to that, how does the federal fiscal system we have in place treat both the producer and the user? Do you have any examples of how the federal fiscal system discourages or encourages the burden of this responsibility?

Mr. Passmore: That's a big question, but on the first point - excuse me for using this term - it is the consumer in demanding the service who creates the externality. In other words, you and I want an energy service. We want to drive our car somewhere. It's that demand that creates the resultant pollution. So there is a responsibility on the part of the consumer to perhaps recognize the results of their demand.

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Price signals are a mechanism that would help them recognize that impact. This gets us to the second part of your question, which is on the role of governments. Perhaps their role would be to make sure that the right price signals are sent. If consumers are completely unaware of the environmental impacts, they won't take the necessary action to avoid them.

Right now, what you and I as consumers typically pay for is called the private cost. It's whatever it costs to generate that power, electricity or fuel privately. We don't add the environmental costs to that. If you take the private costs and environmental costs and add them together, that equals social costs. That's what I was talking about in my presentation about socially optimal results.

The kinds of things I'd like to see the federal government doing as far as leading to that end would be what I suggested, which was that you could use the income tax system, or not, depending on your preference. If you're going to use the income tax system, then I'd like to see flow-through permitted to renewable energy investors.

You can use the concept of direct taxes on emissions in the sense that Eric Haites was talking about, which was to tax the conversion end.

Set-asides are another option available to governments. It can simply declare that it wants to see so much of the power or energy in Canada created by so-called green energy sources. Green pricing is a term for reflecting the environmental impacts.

I gave green power procurement as an example. It was also in this economic instruments book from last year in which we talked about the available roles for the federal government. A lot of this is controlled at the provincial crown electric utility level.

The federal government is a huge consumer of electric power, with something like 50,000 buildings across Canada. As a consumer, it carries the weight of being a consumer. It could go to its utilities in the various jurisdictions across Canada and say that we, as your customer, would like to have a certain percentage of the power we buy as green power.

Those sorts of initiatives are actually being contemplated right now by Natural Resources Canada, and could probably use some support in terms of the types of things this committee might recommend.

Performance standards is another mechanism available to the federal government. Consider ceilings on emissions with tradable permits that permit industry to live within those ceilings and make certain adjustments depending on which industries can react more quickly than others. But those ceilings should gradually come down, because we don't really know what level of fossil consumption for example is sustainable. We don't really know how much carbon we can put into the atmosphere.

We're only at the stage at which we're actually developing measures of sustainability. That's why I said that I don't really think we want to spend a lot of time. I support the idea of a baseline study if we have a lot of intellectual rigour and outside experts involved, but in the meantime, there are things we can do. I think we should set targets and observe the subsequent reaction of the marketplace and the environment to see whether those targets are aggressive enough or not.

If you'll permit me one small example, in California the legislature there decided it was going to say that a certain percentage of vehicles had to have no-emission vehicles - I can't remember if it was 1% or 2% of all vehicles - by 2000. The auto industry just went into spasms. They said it couldn't be done and that it was ridiculous. The government decided they were going to go ahead and pass the legislation anyway. Guess what's happening now? The automotive industry is falling over each other trying to compete to get that market. So as soon as everybody knows what the rules are, they live with them and go out to perform.

Mr. Adams: Mr. Passmore, I noticed that Natural Resources Canada hosted this green power procurement workshop. You have some material from it. Were there proceedings from that workshop? Is there something people can obtain?

Mr. Passmore: Shall I file a copy of the full proceedings with the committee?

Mr. Adams: Yes.

Mr. Passmore: All I gave you were the recommendations.

Mr. Adams: Could you just read its title very quickly?

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Mr. Passmore: Yes. It's called ``Federal Government Green Power Procurement Workshop'', Ottawa, September 27, 1995, hosted by Natural Resources Canada.

Mr. Adams: Thank you very much; that's fine.

Mr. Passmore and Mr. Landry, I'm really pleased you are participating in the pre-budget hearings - again, as you would say.

Could you describe this power production tax credit? It seems to me it's an example of the sort of thing we're discussing. You make the point that it is available to the oil and gas industry. It's not available to the renewable energy sector, and you make the point that it's available to the renewable energy sector in the United States. Could you very succinctly describe what the power production tax credit is?

Mr. Passmore: The power production tax credit is described in the attachments. In the interest of time, is it not better to just -

Mr. Adams: Well, could you do it in a few words? I understand it; I would just like you to get it on the record.

Mr. Passmore: I'm going to refer to the submission of the Canadian Wind Energy Association. A power production tax credit ``does not presently exist in any form for renewable energy. The oil and gas industry presently has tax credit programs available to it.''

Mr. Adams: Listen, I'm sorry, no, could you just describe it for us? I think I do understand it, and I could try to describe it back to you, if you like. For the record I would just like us to know what it is.

Mr. Passmore: Well, the tax credits can take various forms. Perhaps what I'd like you to do is describe what you understand it to be. Then I'll respond, and see if that is an adequate answer.

Mr. Adams: It's a credit on power actually produced. Right?

Mr. Passmore: Yes.

Mr. Adams: It is so much per kilowatt-hour or something like that on power actually produced, not on the process of producing it, but for every kilowatt-hour of power you produce by wind, you would get some sort of tax credit.

Mr. Passmore: That is correct.

Mr. Adams: Right. Oh, Mr. Landry, you already get that, do you?

Mr. Landry: No, we don't get any tax credit. There are no tax credits left in Canada, except for the Atlantic Canada investment tax credit. I'm not quite sure what you're referring to.

Mr. Adams: Mr. Passmore, it's from page 4 of 7 of your presentation, your 1996 budget submission. This is what it says about the power production credit:

This does not presently exist in any form for renewable energy. The oil and gas industry presently has tax credit programs available to it.

Mr. Passmore: Okay. I'm going to have to say that this was just put together over the course of the weekend, and I haven't had a chance to review the particulars of that claim in detail.

If Mr. Landry can't talk about it, I don't know whether I'm in any position to either.

Mr. Adams: Okay, that's fine. I'd be glad of any information you can provide.

Mr. Passmore: Yes.

Mr. Adams: Mr. Landry.

Mr. Landry: Well, I'd would just repeat that there is no tax credit for petroleum production. There are tax deductions, but there is no tax credit. I don't know what you're referring to.

Mr. Adams: Okay, thank you very much, Mr. Chairman.

The Chairman: Thank you, Mr. Adams. Question period is in 50 minutes, so we will try to wind up very soon.

Mr. Finlay, please.

Mr. Finlay: Mr. Chairman, I appreciate the documentation. I wonder whether Mr. Landry would explain a little more to me the chart on the last page. It's entitled ``Economic Impact of a Change in Treatment of Canadian Exploration Expense...'' I'm not sure you detailed what that was. I guess you did, but -

Mr. Landry: Only very quickly. This is the change Stephanie Cairns and others have talked about today. Instead of allowing a 100% immediate write-off of your exploration expenditures, you'd only be allowed to write off 100% if the well turned out to be dry, if it was unsuccessful.

The cost of drilling a successful well would be capitalized and depreciated over some period, maybe 30% a year, maybe over the life of the well. That would result in a tax increase on the industry. Putting that tax increase, that change, into the DRI Canadian econometric model results in this impact on federal revenues, employment, and GDP.

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Mr. Finlay: What is DRI?

Mr. Landry: DRI is Data Resources International. It's a large econometric modelling firm such as the Conference Board of Canada or Informetrica, some of those you be might be familiar with. It's well known. I think the Department of Finance also uses some of their work.

Mrs. Kraft Sloan (York - Simcoe): Mr. Landry, could you give me some clarification on the charts regarding the conventional crude oil reserves-to-production ratio and the natural gas reserves-to-production ratio? Does this mean you have 15 years supply of crude oil in reserve?

Mr. Landry: Yes, what it means is that at the rate of current production, and the known provable, recoverable reserves, we have either 10 or 15 years, depending on the product. It's the assumption that no more wells are drilled, no more reserves are proven, and there's no reason to be concerned that those numbers have dropped. This decline was made on a very conscious decision by the National Energy Board that as long as we kept reinvesting we would get down to maybe more what the North American reserve-to-production ratio is, but we could still fill in for all the production we produced each year, that we'd find enough reserves each year to replace what we produced and we'd stay in the order of having a 10 to 12 year reserve in the ground.

Mrs. Kraft Sloan: Is that the amount of reserves in the ground where you have wells drilled?

Mr. Landry: Yes, and it's known to be producible.

Mrs. Kraft Sloan: What's your total estimate? What number of years do we have left of oil? What number of years do we have left of natural gas?

Mr. Landry: In the case of oil, if you include the oil sands and you're not looking at -

Mrs. Kraft Sloan: With the tar sands.

Mr. Landry: With the tar sands, at the current rate of production, it's a couple of hundred years. For natural gas, in terms of the known reserves it's in the order of 50 years. In oil, it escapes me; it's slightly less, for conventional oil only.

Mrs. Kraft Sloan: It's less than 50 years for conventional oil.

Mr. Landry: Yes. But these are reserves that couldn't be produced at current prices.

Mrs. Kraft Sloan: Right. But in terms of what is totally available, in terms of the best estimate of the industry, it's 50 years for natural gas and less than that for oil.

Mr. Landry: Yes, somewhat less for oil.

Mrs. Kraft Sloan: I have a little bit of concern that when we look at what is potentially available in terms of natural gas and crude oil, so much focus of some of the subsidies and things like that are placed in these two areas when we have another generation and a half that's going to be living with current reserves. I'm wondering if the petroleum industry itself.... Let's just use an example.

If you were one of the big three automakers, and you were in the business of making personal transportation devices, obviously you would have some expertise in providing ways of getting people around. But if you saw the impossibility of these devices for a variety of reasons maybe you would want to diversify. If your industry is involved in providing energy, and I know it's petroleum energy, is there any way they're looking at diversifying into other areas, in some of the more renewable areas? Because they're working themselves out of business in the next 40 to 50 years.

Mr. Landry: I think your first point was if there's that length of life of reserve, why is there financial support through the fiscal system. I think I'd refer to NRCan's study that there isn't very substantial financial support currently in the system.

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Secondly, some members of our industry do invest in other energy forms, but their skills and their knowledge are very particularly in the petroleum sector. Just as the auto industry doesn't suddenly jump into the petroleum sector, we're not jumping very rapidly into another area.

What they are doing is investing constantly in new technologies that reduce the environmental impact and allow for the production of energy with less use of energy and at lower cost. Only through that reinvestment will you have the reserves ever possible to be extracted, which would lead to those 50 years and somewhat less for oil.

Mrs. Kraft Sloan: If the carbon tax were shown to support the preservation and the conservation of the petroleum resources, would your industry be adverse to something like that?

Mr. Landry: I don't think our industry is fearful of the termination or the depletion of the reserve. It will continue to add to it, so therefore I don't think that's a question I can answer.

Mrs. Kraft Sloan: Well, if it's gone in 50 years you can't add to it.

Thank you.

The Chairman: Mr. Passmore, briefly to conclude, we agree with you that while the baseline study has a different speed and that other things can be done, as you had mentioned earlier in your intervention, the baseline study has a certain significance for the long term.

Suppose a baseline study were to be launched and would be in a position to report next fall. Would you see in that kind of timetable a useful utilization of the baseline study for the budget of 1997 and budgets following that year? In addition to what you already said about being disciplined and concise in its composition and so on, what additional recommendation would you want to make as to the future composition of a baseline study task force?

Mr. Passmore: If it could report by next fall, I can certainly see that it would have some advantages and impact for the 1997 budget, keeping in mind that there are things I would like to see happen for the 1996 budget.

The Chairman: We'll come to that later; let's concentrate now on the baseline study.

Mr. Passmore: Yes. I wasn't going to give you any great suggestions for it. It's a very complex task, Mr. Chairman, and I'd be happy to go away and correspond with the committee on this. I can see the minefields we got into with just a very simple thing that the level playing field analysis of Natural Resources Canada was trying to explore. It worries me that there are a number of barriers to a successful baseline study, as pointed out by Dave Runnalls when he talked to you last week.

In my experience, there's a lot of time and money spent on this sort of analysis. I'm more interested in seeing direct action and direct measures taken. I realize and I support Stephanie Cairns's comment that in some cases we need the information before we know what measures to take and that perhaps this study jumped the gun a little bit, because there was a lot of time spent arguing by vested interests.

The Chairman: Are you satisfied that the data on which NRCan is operating are sufficiently independent?

Mr. Passmore: To conduct a baseline study on their own?

The Chairman: Yes.

Mr. Passmore: No.

The Chairman: What is the main source of data for NRCan, in your opinion?

Mr. Passmore: It's not just the main source of data, Mr. Chairman. For example, one of the comments we have on NRCan with respect to this level playing field study is that depending on what your input numbers are, you can prove anything you want to in terms of the results. All we would like to see for this particular study is spreadsheets. We need to know what numbers went in in order to realize or to better understand how they could come to the conclusions they did. Because the conclusions they came to don't reflect market reality.

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The sources for their numbers come from all sorts of places. They get a lot of it themselves. They get it from utilities, from the industry, from doing surveys, and from Statistics Canada. But I think the people who would be involved in this baseline study have to be from outside the federal civil service, not just outside NRCan and other departments, but outside the federal civil service. That would involve scientists, academics and so on. It becomes a major undertaking at considerable expense and I wonder whether you could complete it by the fall of 1996.

The Chairman: Who should lead that exercise?

Mr. Passmore: Perhaps it could be led by a combination of representatives of Finance, Environment and NRCan with some non-vested interests from the outside. So maybe it'd be a panel of five or six people that would include those three departments and perhaps someone from the academic community who doesn't necessarily have a vested interest.

The only difficulty with the academic community.... I think you're having a presentation by André Plourde later this week. He acknowledges himself that he will give you the theoretical, purest point of view, but it's not based on any experience in the marketplace.

It's difficult to find stakeholders who ultimately don't bring forward a vested interest. That's why we have people like you. At a certain point in time politicians are going to have make decisions.

The Chairman: The last question is in terms of the focus on the next budget, to which you have referred. What would you like to see included in the next budget in terms of the future for energy?

Mr. Passmore: Mr. Chairman, we're not being particularly ambitious, but we think that the very modest suggestions we've made in the submission by the Canadian Wind Energy Association that had to do with flow-through shares and putting us on a level playing field with the petroleum sector would be a major move in terms of seeing more hardware result. That's ultimately what I'm here for. I'm not really here to see more paper created. I'm here to see hardware installed. That's what's going to lead you to achieving your year 2000 targets.

I wouldn't go beyond the very modest suggestions that we've made, beyond the two I made in my presentation, the flow-through shares and the green power procurement, and an additional one Mr. Adams referred to, the power production tax credit in the Canadian Wind Energy Association submission.

The Chairman: Do you have any comments on research and development?

Mr. Passmore: There's virtually no funding of any consequence in Canada for R and D for renewable energy. For wind energy, which is just one subcomponent of renewable, the R and D is less than $1 million a year. The same is true for photovoltaics, solar thermal, and small hydro. I think there's a little bit more for bioenergy. There's not a lot of money in R and D compared to what is being spent in other countries. We are missing the boat.

As far as wind energy, there are 17,000 wind turbines installed in California. There are 2,000 installed in a little country like Denmark. There are over 3,000 installed in Germany. I would say there are 500 megawatts in that in the last two and a half years. France, Spain, all these countries.... India has a huge procurement initiative in the wind energy realm. We continue to miss the boat on that front.

The connection between what's happening in the market and R and D is very important. While I think we need to do more in research and development and constantly upgrade the shelf life of the technologies, if there's no market pull the R and D money is wasted. Then you have what I call R and D backlog, because everything gets R-and-D'd, stops at the shelf and never gets bought.

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So we need market pull, and the way we can generate that sort of market pull is through customer demand for green power - the federal government is a customer - the sorts of very modest fiscal measures I've suggested, and through taxes to get the prices right.

That's easy to say, hard to do in some cases. The one related to taxes might be hard to do.

The Chairman: Is there any additional comment you would like to make before we conclude?

Mr. Passmore: No, thank you very much, Mr. Chairman. I appreciate the opportunity. I'm sorry I was so fast with the first walk-through of my notes, and I will provide you perhaps.... In addition to the material you have, I had actually prepared more direct answers to the six questions. So I'll file those in writing.

The Chairman: Mr. Landry, any additional comments?

Mr. Landry: No, thank you very much.

The Chairman: Then we thank you both, and we will adjourn to 3:30 p.m.