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EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, November 22, 1995

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[Translation]

The Chairman: Order, please.

Good afternoon, ladies and gentlemen. Today, we are beginning our examination of fiscal disincentives to sound environmental practices. But before we start, I would like to have two motions adopted by the committee.

The first concerns the makeup of Mrs. Karen Kraft Sloan subcommittee. The Clerk has distributed a motion to all members. It is drafted in French and in English. It says: That, as a result of the membership changes to the Standing Committee on Environment and Sustainable Development, the Chair named four new members in addition to Karen Kraft Sloan, to the subcommittee on Environmental Awareness for Sustainability and that Karen Kraft Sloan continue to be Chair of the said subcommittee.

Could I have a motion to that effect?

Mr. Adams (Peterborough): I so move.

The Chairman: Thank you. Are there any questions?

Mr. Pomerleau (Anjou - Rivière-des-Prairies): I did not attend the last few meetings. Will the subcommittee need specific funding? It's a working subcommittee, isn't it?

The Chairman: To my knowledge, it works with the same budget as our committee.

Are there any other questions?

The motion is adopted unanimously

[English]

The Chairman: Then we have another motion, which relates to the parliamentary conference on the Arctic region to take place in March 1996 and the desirability of having a subcommittee that would, in the light of the agenda the parliamentary secretary Mr. Lincoln has worked out with the Swedes, the Finns, and the Danes in the late fall...parliamentary input would be provided for our colleagues when they meet in March. The work of the subcommittee would be elaborating and preparing specific recommendations that emanate from that agenda. Needless to say, the work of the parliamentarians in March of next year would be considerably facilitated, and the input of the Canadian parliamentarians would be very welcome, if this subcommittee were to be launched and given an opportunity to proceed.

As you can see from the motion, which is also on your desk, the subcommittee would report by February 28, 1996. It would have the usual powers to send for persons, papers, and records; to print; and to be provided with the research services of the Library of Parliament. It would be composed of five members, including the chair, to be named by the chair, and so forth.

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So you have the motion. It is a standard motion for the creation of a subcommittee. I would be grateful if someone could move it.

Mr. Lincoln (Lachine - Lac-Saint-Louis): That's the chair and two members from the government -

The Chairman: It would be three members from the government side and then one for each party, for a total of five.

Mr. Lincoln has so moved, seconded by Mr. Wappel. Are there any questions? Any discussion?

Motion agreed to

The Chairman: We shall now move into the business of the day. I'm very pleased to have our witnesses present here today. They are individuals who have thought about this subject matter and contributed to the evolution of the thought of sustainable development for many years.

We are here with three purposes in mind.

Number one is to obtain a progress report on federal efforts to produce a baseline study on the various forms of fiscal support to pollution activities and sustainable practices.

Number two is to determine an appropriate process for conducting the baseline study and to demonstrate that a methodology exists, how it has been done elsewhere, and how it could be continued and carried out in Canada.

Number three is to identify through four sectors, which have been identified as panels - mining, agriculture, energy, and transportation - the disincentives to sound environmental practices that exist at the federal level and, through that, to arrive at specific recommendations on how they can be replaced by environmentally sound policy alternatives. Some people would say that this is an attempt by this committee to make the next federal budget green.

Maybe these are optimists, but it could be the beginning of a process that eventually will become as such.

Because of the next budget, we have, with the help of this committee that met three weeks ago and with the help of the clerk and the library, put together a rapid schedule that will permit reporting back to the House, and therefore to the system at large, particularly to the Department of Finance and its minister, the conclusions of this committee. So this committee will serve several purposes - of refreshing memories, of demonstrating the possibilities and potential opportunities, and, hopefully, of inserting itself into the budget-making process.

I'm sure that every member of this committee is delighted to have here Arthur Hanson, David Runnalls, and James MacNeill. They've been referred to at times, in biblical terminology, as the Three Wise Men of sustainable development, and I'm sure they carry this nomenclature or this description with dignity and with pride. I'm certainly happy to have the opportunity, on behalf of the committee, to thank them. I'm quite confident that they will launch our deliberation in the best possible manner that can be achieved anywhere in the globe, not just in Canada or in North America, because of their wide experience and knowledge.

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So without any further ado - and I have already surpassed my three minutes time limit in caucus - for those who have just joined us, I must inform you that in this room, on Wednesday mornings, we meet as a caucus and therefore this room is rather packed and arranged in a different manner.

In this room the rule is that each speech ought not to be more than three minutes. So this is why I was referring to the time that I have overstepped.

Let me conclude, then, by thanking you again and, before giving the floor to Mr. MacNeill, recognizing our vice-chair, who wishes to make a statement.

Mrs. Kraft Sloan (York - Simcoe): Thank you very much, Mr. Chair. I want to say thank you very much to the guests who are here this afternoon. We are certainly looking forward to your testimony.

I wanted to draw to the attention of the committee members and our witnesses that in the back we have a whole group of the future of Canada. We have students here from Bradford High School, which is in my riding of York - Simcoe, and we're very pleased to have them here this afternoon.

What more can I say? We should let the three wise men of sustainable development go forth. Thank you.

[Translation]

The Chairman: Mr. MacNeill, you have the floor.

[English]

Mr. James MacNeill (Chair, International Institute for Sustainable Development): Thank you very much, Mr. Chairman, and ladies and gentlemen of the audience. I'd like to thank you, Chairman, for that warm and generous introduction.

I always look forward to appearing before this important Commons committee, but this is the fist time I've been introduced with a biblical reference. I'm sure that's true of my colleagues. I hope we can live up to the billing but I doubt it.

My pleasure today is increased by the fact that I'm appearing with two senior colleagues from IISD, as you mentioned: Dr. Art Hanson, our president and chief executive officer, and David Runnalls, who is a senior fellow and also the director of our trade and sustainable development programs. You know them both. They've appeared here often, and as you mentioned, they are both pioneers in the field of environment and sustainable development.

First, I'm going to make some general remarks, some specific remarks, and more or less lay at least some of the foundation for their later remarks.

I'd like to begin, Mr. Chairman, by saying how pleased we were to learn from the clerk's letter, and from your remarks at the opening a few minutes ago, that this committee has decided to undertake a review of fiscal disincentives to sound environmental practices and to do what it can. I must say that your track record suggests that you can do a great deal to ensure that the long-promised baseline study is launched as soon as possible.

In my remarks here and abroad, I often refer to the government's red book promise that:

This study it said would be used, among other things, as a basis for future evaluations of fiscal policies. The rationale for this baseline study, Mr. Chairman, in my view, is as powerful today as it was when the promise was written, and I would urge the government to launch it as soon as possible. When it does, I would like to assure this committee and those involved that the International Institute for Sustainable Development will offer every possible support.

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I have, as you suggested in your opener, Mr. Chairman, worked professionally on these questions for years. I am convinced that fiscal disincentives represent the highest and greatest barriers to more sustainable forms of development in Canada and elsewhere. In addition, they burden the budget with billions every year, something that is of great importance at this moment.

Before getting into the meat of my presentation, Mr. Chairman, I would like to make just a few general comments - four, I think, in all.

The first is to underline that when we talk about sustainable development, we are talking about development that is both economically and environmentally sustainable. The two go hand in hand. Thanks to the incredible growth of the past few decades, our economic and environmental systems are now totally interlocked ``till death do them part'', according to Thomas d'Aquino , the head of the Business Council on National Issues.

If we ignore one system today, we jeopardize the other system. It works both ways. The collapse of the east coast fisheries is, I think, the latest and perhaps most dramatic example of this point. Canadians have learned - at least I hope they have learned - that economic decisions affect the environment, and environmental decisions affect the economy. The two go hand in hand.

My second point is that both economic and environmental decisions reflect the incentives that people face. Obviously the most important of these incentives are those that are signalled through the market in the form of prices. We accept this readily in the field of economic policy. We accept that when prices go up for a good because of the market or because of adding GST and other taxes, demand falls. We accept it in the field of agricultural policy. When you pay a farmer to grow wheat and you don't pay him to grow trees, he will grow wheat. In fact, he may even remove trees to grow more wheat, even when those trees may store water for him or may stop erosion.

We accept it in the field of transportation policies. If you reduce the price of fossil fuels, consumption increases and so do carbon emissions that cause pollution, air pollution, acid rain, global warming and so on. The point is that price affects behaviour, and behaviour affects not only the economy but also the environment.

My third point is that government policies affect behaviour, not only through regulation and command and control instruments, but also through taxes, subsidies, fees and charges and a range of other economic instruments. Sometimes that's their purpose. We want to affect behaviour, as in the case of tobacco, for example. Sometimes that isn't their purpose but it happens anyway. Sometimes when it happens it takes some surprisingly perverse forms.

The critical question before this committee in this exercise, I would submit, is how can we ensure that government policies, especially its tax and fiscal policies, encourage decision-makers, whether they are in board rooms, on the farm or buying groceries in a supermarket, to make decisions that support development that is sustainable, economically and environmentally sustainable?

At the moment, they often don't do so. In fact, Mr. Chairman, many of our economic, fiscal and tax policies, as you know, encourage people to make decisions that support and accelerate unsustainable forms of development. Some encourage inefficiency and waste in the use of energy and other resources, thus not only increasing damage to the environment but also reducing the country's international competitiveness.

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Some of these policies tax jobs and penalize the creation of jobs in order to raise revenue when we could be raising revenue by taxes that encourage efficiency, job creation and competitiveness.

Paul Martin, as you probably know, recently said that there is nothing more ludicrous than a tax on hiring. That's what a payroll tax is. It's especially ludicrous, I would submit, when there are options. And there are options.

Some of these policies also accelerate the depletion of renewable resources: forests, fisheries, soils, species habitats, and so on. They also produce growing ecological deficits. This steady depletion of Canada's basic stocks of ecological capital is as damaging to our economy in the longer term as the economic deficit.

A recent World Bank report spells out in detail just how important are our stocks of ecological capital. It's because of those stocks, among other things, that Canada, in their view, is the richest country per capita in the world.

Many national and international bodies, such as the World Bank and the OECD, as well as our own institute, the IISD, have been examining these incentive regimes for years.

That brings me to me fourth point, which is that this work of many world-scale institutes and intergovernmental bodies has demonstrated clearly that incentive regimes that are economically and environmentally perverse can be modified. What's more, they can be modified and gradually turned around in ways that improve both economic and environmental performance. There's no cruel choice here, at least not in the medium to long term.

IISD has just published a book full of positive examples of actions by a number of governments to do just that. My colleague Art Hanson will be telling you about it. In fact, the book may have been distributed before the meeting.

Mr. Chairman, until a few hours ago the OECD was holding a workshop on this very issue. The IISD is playing an important role in that workshop, and Dr. Hanson will be telling you about that as well.

Mr. Chairman, if the goal is sustainable development, and more than 100 governments, including Canada's, have endorsed that goal as spelled out by the Brundtland commission, then governments should design and deploy their tax and their fiscal policies in ways that encourage development that is economically, socially and environmentally sustainable.

That may go without saying, but I think it's important to say it. A friend of mine, whom some of you may know, Emile van Lennep, the former secretary general of the OECD, was speaking to the World Bank on this matter a few weeks ago. He put it another way. He said:

We're not doing that nearly to the extent that we could.

There is some good news here, and I'd like to turn to it just briefly before moving on to the bad news.

Thanks to a lot of changes, mainly in the private sector, I have to say, a transition to a more sustainable economy is in fact under way, at least in a few areas and in a few countries, including Canada, as we saw in the OECD's recent review.

A more efficient and potentially more sustainable economy has begun slowly to emerge. This economy is marked by people relying more heavily on information and intelligence. In some sectors, they are producing more jobs and more income while using fewer and cleaner energy materials and resources for every unit of production. I could go on to spell that out in more detail, but I will leave it there.

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The bad news, Mr. Chairman, is that this transition to a sustainable economy is being seriously impeded in a number of ways. Two of them fall clearly within the purview of this committee and this current set of hearings.

First, there's the fact that the market does not - in fact, an unaided market cannot - ensure that the costs of environmental pollution and resource depletion is reflected in the prices we pay for products. The market, as you know, treats environmental resources as free goods with a zero price and it transfers the costs of pollution and resource depletion to the broader community. The broader community shoulders those costs in the form of damages, economic damages to health and property and ecosystems.

In other words, normal market prices for a product don't reflect the environmental costs associated with its production, distribution or use. In other words, pollution in the market is underpriced.

Because of this, back in 1971 OECD developed what it called the ``polluter pays principle''. I was a part of that exercise, and I remember it well.

The PPP is an economic and trade principle, Mr. Chairman, as much as it is an environmental principle. I thought then, and I still think now, that this should have been called the ``consumer pays principle'', but in any event, it's the PPP.

We've seen some progress in this area since 1971. We have deposit-refund charges in some countries and provinces for certain products. In a few countries, we have fees and charges on other things, such as solid waste removal, toxic releases into air and water, and so on.

There's been some progress, but we have a long way to go. Everyone seems to agree that the polluter should pay, but getting him or her to pay is not an easy matter. We've learned that the polluter usually doesn't want to pay. We've also learned that he or she will go to great lengths politically to avoid policies that would force them to pay. We have learned also that they have much more political clout, as a rule, than mere economic advisers, even when introduced by references to the Bible.

For the most part, Mr. Chairman, pollution and resource depletion remains underpriced.

Second - this is even more significant, I think - the price that is charged in the market not only fails to reflect the external costs of pollution and resource depletion, as I said; it may be pushed even lower by virtue of subsidies of all kinds. So there's a double whammy here.

Emile van Lennep told the World Bank, in the statement I referred to a moment ago, that governments not only:

All governments today, Mr. Chairman, pay lip-service to the market, even the Chinese and Russian governments. Then they intervene to tilt the playing field in ways they find politically convenient, usually in ways that seem to give them a short-term advantage. Strangely enough, OECD countries, which one would expect to be the greatest defenders of the free market, lead the world in this practice.

Some experts estimate that, taken together, OECD governments provide now perhaps a trillion tax dollars a year in subsidies, grants, tax write-offs, sweetheart leases, and other kinds of incentives. We find them in energy, agriculture, forestry, fisheries, water development, and industrial development of all kinds. A trillion tax dollars is what we were spending on armaments as much as a few years ago during the height of the Cold War.

I'm currently associated with a study being undertaken by a Dutch institute. It's the financial institute in Holland that advises their finance ministry. This study is being undertaken under the guidance of Emile van Lennep.

It has found that the scale of the subsidies being provided are really quite enormous. I'll just take two examples.

Governments worldwide provide over $350 billion at the moment in energy subsidies. Governments in OECD countries alone provide over $350 billion in agricultural subsidies.

Now, van Lennep says that the distortionary impacts of these market interventions are even more important than their magnitude. The distortionary impacts are more important than their magnitude.

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Most of them are economically perverse, encouraging inefficiency and the use of more input energy and other resource inputs per unit of input, not less.

Many of them are ecologically destructive. Evidence suggests, for example, that removing energy subsidies alone could reduce global carbon dioxide emissions by 10% to 20%.

Some of them are trade-distorting.

And some subsidies are all three at the same time: economically perverse, ecologically destructive and trade-distorting. Now, that's a hat-trick. I sometimes think we have more to fear from the visible hand of government in this area than from the invisible hand of the market.

What's the situation in Canada? I want to take two examples: energy and, time permitting, agriculture.

For energy, the 1994-95 estimates provide over $329 million in direct payments to the oil and gas sector. In addition to that, of course, there are the tax breaks, and they are much more important. In 1993-94 they totalled over $6.2 billion.

With these tax deductions of $6.2 billion, assuming an average tax rate of 20%, the government lost over $1.2 billion in revenue. If we add to that $1.2 billion the direct subsidies of $325 million, assuming that tax expenditures were at the same level in 1994-95 as in 1993-94, it would appear the federal government alone paid out, or failed to collect, a total of $1.5 billion. That could go a long way towards the deficit.

At the same time, as we are subsidizing the fossil fuel industry in this way, the government provides less than $50 million for programs to encourage energy efficiency. Obviously the government's right hand doesn't know what its left hand is doing, and the red book says this several times in plain language.

I have personally worked for over fifty governments in my time, and I long ago learned that the policy of any government on any issue is to be found not in what its ministers say but in what its budgets say.

In light of that, I would like to ask this committee a question. What is the policy of the Government of Canada on global warming? Is it to reduce emissions to 1990 levels by the year 2000, or is it to deploy our limited resources in ways that in fact encourage greater production and consumption of fossil fuels and encourage higher levels of carbon dioxide emissions? The answer, I submit, is to be found in the budget, not in what ministers say.

This week in Edmonton the Minister of the Environment, quite rightly I think, threw up her hands in despair. The gap between Canada's international rhetoric and its domestic performance on this issue is appalling, has been for years, and is getting worse. As you know, it is now estimated that by the year 2000 Canada's carbon emissions, which are among the highest in the world per capita, will increase by 13% to 15% over 1990 levels.

These subsidies I referred to tilt the playing field in favour of fossil fuels. They penalize efficiency, they penalize renewables and they result in more acid rain and global warming. I'm personally convinced we will not reach our international commitments unless and until they are reformed.

Energy subsidies and tax expenditures can be reduced at great savings to the taxpayers, and new incentives can be provided in ways that not only discourage fuels that lead to air pollution, acid rain and global warming but also encourage a steady increase in energy efficiency and economic competitiveness. I hope the government begins to move in this direction starting with the next budget.

I was going to go on and speak about agriculture, but in view of the time, I will leave that to any questions there might be. Perhaps my colleagues will take it up. In the few minutes remaining to me, I am going to say something about taxes.

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Before I do, I have just one last point. It seems to me reforming perverse incentives in energy, agriculture and other sectors would reduce a major source of price distortion that influences behaviour in the wrong way. It may not be easy, but neither should it be all that difficult.

Reforms along these lines could make for some interesting coalitions. It seems to me they should be supported by free market liberals; that is, those who really do believe in the market. They should be supported by fiscal conservatives. They should be supported by budget balancers and by environmentalists, and that would make for an interesting coalition.

Well, this is my last point. Reforming these perverse subsidies will, as I said, reduce a major source of distortions, but it won't level the playing field. In order to do that, as I pointed out at the beginning, we have to find ways to internalize the external costs of production and consumption. Economic instruments focused on the end of the pipe can do some of that, but if we really want to work on this we have to move upstream.

In recent years, Mr. Chairman, a growing number of institutions and experts have been taking a fresh look at our traditional tax regimes. What do they find? They find that in general we tax economic and social goods like income, personal savings and job-creating investments, and at the same time, we fail to tax economic and social bads like pollution, environmentally damaging products and resource depletion. Indeed, as I just pointed out, we spend billions subsidizing resource depletion.

One of the senior economists who has been working on this, Robert Repetto of the World Resources Institute in Washington, puts it another way. He points out, and I quote him: ``Our taxes fall mostly on just those activities that make the economy productive: work, savings, investment and risk-taking''. Naturally, he adds, such taxes discourage people from undertaking these vital activities. A better system, he says, would place more of the tax burden on activities that make the economy unproductive and that should be discouraged, such as resource waste, pollution and congestion.

Taxes on these and other environmentally damaging activities would not distort economic decisions but would correct existing distortions.

Several prestigious institutes have proposed governments examine the feasibility of a gradual shift in the burden of taxation. They have proposed governments gradually reduce taxes on income, savings and investment, and just as gradually increase them on energy and resource use, on polluting emissions to land, air and water, and on products with a high environmental impact. Now, this kind of reform could be revenue-neutral, and it could take place over time.

Well, Mr. Chairman, I will stop there. I look forward to the committee's questions later and I will be followed by David Runnalls and then Dr. Hanson.

The Chairman: Thank you. Please.

Mr. David Runnalls (Senior Fellow, International Institute for Sustainable Development): Thank you very much, Mr. Chairman. I join Jim in thanking you for the longer-than-three-minute introduction.

I was saying to Art, however, it's a good thing four of us didn't turn up. I think we will sound enough like the four horsemen of the apocalypse without that sort of an introduction.

I will be brief, because Jim has covered the ground with his usual breadth of vision and acuity of statement. But if I may, Mr. Chairman, I will take you back a little bit into history.

I was one of the minor co-authors of chapter 4 of the red book, and I was thinking last night as I was preparing these remarks about what we were thinking about when we wrote it. In writing it, we were struck with the gap in rhetoric between what Canada was saying in international meetings and our actual practice at home. Jim mentioned this, and it was true at the time as well.

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Canada was one of the most prominent delegations at the Earth Summit in Rio de Janeiro in 1992. We agreed to lots of things there: CO2 reductions to combat climate change, protection of biodiversity resources, reform of natural resource management policies, and, most importantly, moving to integrate environmental policy into all economic decisions.

The fact is that the red book implies under sustainable development that the environment becomes a big-ticket economic issue. It's right up there with deficit reduction, job creation, export growth and other things that ministers of finance have to think about when they're developing budgets.

It's not any longer a boutique issue you deal with when you're constructing the budget of the environment ministry or the ministry with responsibility for national parks. I came to this minor role in the red book after two years of hard slogging on the Ontario Round Table on Environment and Economy.

We tried, successfully I think, to prepare a sustainable development strategy for the province. With a group of seven CEOs, seven senior ministers from the Peterson government at the time, and representatives from the major environmental groups in the province, we concluded at an early stage that we couldn't do something like this and get CEOs and ministers, including the provincial treasurers and environmentalists, to sign it off unless it was driven by a series of very clear principles.

The first and most important of these principles was easily agreed upon, although it's interesting that the execution is more difficult. This was full cost pricing, which Jim talked about. Full cost pricing implies an economic system where the price of goods includes environmental costs associated with producing, using and disposing of it.

As with eliminating subsidies, this is a very easy principle to agree to as long as you don't have to talk specifics with the various people around the table. If we have a chance in the questions, Mr. Chairman.... Jim and I were involved in a study for Ontario Hydro in which we looked at full cost pricing of electricity. This is an interesting but rather difficult issue.

The market is a wonderful thing. It can allocate resources efficiently without undue interference of bureaucrats. It can stimulate efficiency. It can create jobs. It can even help to protect the environment. But it cannot do all of these things unless the price of goods reflects the cost of producing the goods.

We who were on the round table knew Ontario and Canada were a long way away from that kind of cost internalization, as the economists call it. We agreed, therefore, to take a first small step.

The first small step toward full cost pricing would involve cutting back the subsidies and tax expenditures sending perverse signals to the province's farmers, forest product companies and other users of the natural resource base. Having done that, we could then move on to changing the price signals to reflect the environmental costs of production.

Returning to Canada from the Earth Summit, as I said before, it struck many of us that Canada was not in a very good position to implement many of the things we blithely agreed to do at Rio.

Jim has mentioned some of the wrong signals that subsidies and tax expenditures send to farmers and the energy industry. Interestingly, in Ontario we found the supply management system, a totally different system for dealing with agriculture than the grain system in the prairies, sent the same wrong signals to Ontario's rather protected farmers that the grain subsidy system sent to the more open farming systems of the prairies.

I think you'll be hearing next week, Mr. Chairman, from John Girt, who is the author of this study and is very familiar with it, so we could discuss it a bit later if you're interested.

We could add to this the years - decades even - of low-cost loans, regional development grants and the like, which contributed to the destruction of the Atlantic fishery. We could add the decades of underpricing the forest resources of the country.

In one study presented to the Ontario round table we discovered that the province did not even recover the cost of the roads and other infrastructure that had been constructed to provide forest product companies access to our forest resources. In some sense, therefore, the trees were free.

For all of these reasons, it seems self-evident to us that a new government should begin with a solid understanding of where we were. What sorts of signals are we sending to Canadians who earn their living from our natural resources? What sorts of signals we are sending to the energy industry and the users of energy? What sorts of signals we are sending to the auto industry and to those of us who drive cars?

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Mr. Chairman, we're now, as you know, halfway through the normal mandate of a government. As one commentator put it the other day, this may be Mr. Martin's last non-election budget. He clearly will be looking for additional savings. The argument for subsidy reduction and the reduction of tax breaks is therefore stronger than ever before. As Jim said, fiscal conservatives and environmentalists can and should make common cause in this next budget.

To do that, however, we still must know where we are. Although we still do not have a baseline study, we've made some progress. The Task Force on Economic Instruments and Disincentives has tabled its report. I would submit, Mr. Chairman, that this task force was a perfect example of how not to go about this kind of work, although the report does contain some minor useful recommendations.

Some elements of what could be needed for a baseline study have been completed within departments. Here I'm thinking...and I don't necessarily want to take you through the argument, but I'd like to show you an overhead or two on the baseline study or level playing field study that's recently been completed by the Department of Natural Resources.

If I may, Mr. Chairman, I'll go up to the front and put these on the screen. It's a good consultant's adage, Mr. Chairman, that when there's nothing in your head, you should use an overhead.

As I say, you will be hearing from officials from the Department of Natural Resources next week. I don't necessarily want to take you through the argumentation, but I think this study gives you a fair idea of the kinds of useful information you can actually get from a baseline study.

If you look at the capital costs of various methods of producing energy in Canada, you'll notice the enormous capital costs of oil sands mining, offshore oil from the east coast - not a great surprise to anyone, I suspect - particularly in these figures here, as a percentage of the capital costs the federal government is essentially helping to subsidize. You'll find it's very high in the case of oil sands and offshore oil from the east coast.

Notice what you get for building retrofits, solar walls, and most renewable energy sources. That is in fact negative, as you can see down here. If you look up here, you'll notice 20.8%, 17.1%, for offshore oil and oil sands.

Mr. Finlay (Oxford): What about ethanol?

Mr. Runnalls: It's because of the enormous subsidy applied in ethanol. Ethanol is a very highly subsidized energy source.

I won't take you through this in any more detail, because you are going to be seeing officials from the department next week. But I want to remind you of the environmental consequences.

This is a very neat little chart that shows you the kinds of CO2 emissions you get per unit of energy from energy produced by oil sands, 15,000; conventional oil, only 3,700; natural gas, 4,600. I remind you from our previous view of the baseline studies that in one way or another we are subsidizing the production of oil from tar sands very heavily. We are therefore, as Jim said, subsidizing the most CO2 intensive form of energy produced in Canada.

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This study does not, as you can see, factor in the environmental costs of producing and using fossil fuels, but I think the study is very instructive in the way in which these baseline studies can be instructive, pointing out the very wide divergence between the support provided for offshore oil and most forms of non-conventional, less polluting, energy sources. Perhaps most startling, as we've noted, is the very substantial advantage accorded to oil produced from tar sands.

This study has been produced by the department using a rigorous methodology. This is not the kind of exercise that can easily be done on the back of an envelope. It produces some fairly obvious policy conclusions for those interested both in sustainable energy development and in budget reductions. You'll have the opportunity to question the public servants from the department next week about this.

I present this, Mr. Chairman, not necessarily to trigger a debate at the moment on Canada's progress or lack of it toward a sustainable energy strategy; rather, I put in on the table as an example of the kind of work you will need from other departments, and indeed from other parts of the Department of Natural Resources if the Minister of Finance is to produce a more sustainable budget in March. It will also be critical to efforts to review natural resource taxes which the Minister of Finance pledged to do in his budget statement in February of this year. I frankly find it inconceivable that resource taxes can be adjusted in the absence of a rigorous analysis of this sort of the effect of present taxes.

Mr. Chairman, I'll conclude by pointing out four areas of difficulty that I think you will run into in the production of a baseline study. These include resistance from within the bureaucracy, although I think there is probably more of this information available then has yet managed to surface.

You will also be told I'm sure, Mr. Chairman, by the tax community that a tax system is designed to raise revenue and not change behaviour. You will also see - and we've seen this already in the Task Force on Economic Instruments and Disincentives - a very real opposition on the part of anyone who does receive a current subsidy. We discovered, as I said before, on the Ontario round table that full cost pricing was a very attractive concept for our chief executive officer members until we started talking about full cost pricing of whatever good was produced by each of the members.

Finally, the reason I'm still keeping you in the dark and hope to put you in the light is that you will be told repeatedly that Canadians aren't interested in this stuff, Canadians are suffering from eco-fatigue, and that the environment is no longer a public issue of any real consequence. I would like to show you very quickly, if I may, three slides courtesy of The Environmental Monitor.

Essentially the question was asked in the worst part of the recession, at least in central and eastern Canada: ``Do you still prefer to have strict environmental regulation to continue?'' You find that you get exactly the same results in December 1992 and April 1994.

Secondly, when you ask a question of Canadians about what they think about sustainable development, in 1992 you get 72% of Canadians feeling that it's a major priority, and 81% by January of this year. If you take in moderate priority as well, you get 95% of Canadians saying quite readily that they feel that sustainable development should be one of the major priorities of Canadian policy.

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Finally, internationally we may not stack up terribly well on performance, but this is a University of Chicago survey that asked what the pollsters call an unintuitive question. In other words, the easiest way to answer this is to say yes, prices and jobs are more important than future environment. In Canada, 61% of Canadians strongly or somewhat disagree with that statement; that's a higher percentage than in any of the other countries surveyed.

Mr. Chairman, I'm not going to tell you your business as politicians, but I think there is more support amongst the Canadian public for this sort of action than one readily believes.

Finally, there's one other resistance you will encounter, and this is a genuine and legitimate one and a very difficult one to deal with. It is that anyone involved in either the export business or the trade community in Canada will be very wary of wanting to expose subsidies to public scrutiny.

For any of you who have dealt with the United States on trade issues, the word ``subsidy'' instantly triggers a vast army of lobbyists in Washington, cases before the GATT/World Trade Organization tribunal, and cases before the tribunal under the North American Free Trade Agreement. The American lobbyists will be watching very closely to see if in fact subsidies in particular sensitive industries are revealed. Anybody who has dealt with softwood lumber will know the degree to which that can be a difficulty.

It is therefore very important in these sorts of studies to distinguish between subsidies and tax expenditures, and I think you will probably be given evidence on that next week.

Finally, Mr. Chairman, as Jim MacNeill has said, we need to move somewhat away from our traditional system of taxing the goods and toward taxing the bads, or at least not subsidizing the bads. In order to do that, we need to begin with a set of robust, defensible analyses of where we are now.

We have a beginning with the NRCan study for energy. Similar work needs to be pulled together quickly for the other sectors you're going to be hearing from next week.

As I said before, I suspect a good deal of this information already exists, but it will be extremely difficult to assemble it in time. I urge you to pursue your efforts to implement the green plan's or the red book's promise for a baseline study. As you can see from the energy work, it is the only way to begin to make serious policy decisions in this area.

Thank you, Mr. Chairman. I'm sorry I took so long.

The Chairman: Thank you, Mr. Runnalls.

Mr. Hanson, please.

Mr. Arthur Hanson (President and Chief Executive Officer, International Institute for Sustainable Development): Thank you very much, Mr. Chair.

I'm delighted to be here as well and to appear again. This is not my first visit in front of this committee, and in fact we have talked about some of these issues in the past.

I want to leave with you several publications that IISD has produced in this area. One is a paper that was actually prepared in 1994, entitled Sustainable Development Considerations for the Federal Budget 1994 and Beyond. We're clearly in the ``beyond'' now.

I've gone through this paper again, and I feel it states very clearly some of the points on how we might proceed. At that point in time we were taking some views drawn from the red book and using that as our starting point. So I would leave that paper with you rather than quoting from it.

I also want to point out several publications we've brought along. One is an action plan. This was really an earlier publication, again from 1994, on what we view as protecting the environment and reducing Canada's deficit. We also believe it is important to put the context of a green budget reform in the context of deficit reduction.

More recently we have published two major works, both derived from the same information base but differently presented. One is called Making Budgets Green, which is a summary of experience in North America, both Canada and the United States, and in western Europe. It takes some of these market-based instruments, the alteration of subsidy patterns that Jim and David have talked about, and demonstrates how they actually can work. A very important point we want to reinforce today is that in some jurisdictions these new tax measures, reductions and redirection of subsidies, are working and are working well.

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We've analyzed those in more depth in this book called Green Budget Reform. I see that you all have copies of that book now. It's particularly important that you read the first and the last chapters if you want to get a good overview of what these instruments are, what some of the impediments to change are, and, particularly out of the lessons learned, what some of the directions ahead are.

Jim referred already to the work of OECD. This has been and continues to be a very important theme for OECD. In fact, they're having a workshop at present on eliminating perverse subsidies, and they're trying to develop a work program in this field.

We were asked, on very short notice, to put together essentially a ``what's the problem?'' kind of statement. I've made copies of that for everyone as well. You might find that to be of interest.

So this is background to my comments.

What I would like to do is focus on what I consider to be some key elements, not so much of what these instruments are and so on. If we can accept that there are workable economic instruments to deal with the issues, then the question is why these have not been adopted more quickly. Where is the resistance? Who favours change? This is a very important issue for this committee to address, because unless we can deal with the political and institutional issues, it is going to be very difficult to create some of the necessary changes.

I think it's clear from all of our presentations that we are taking a sustainable development approach, one that links economic efficiency and cost internalization concerns with those of the well-being of people and equity considerations, and finally, of course, environmental protection and enhancement. Ideally, we search for win-win-win situations with those three. On occasion, we'll settle for something less.

The important point here is that when we are looking at this in the context of baseline study, it is very important not simply to stop at the resource sectors or transportation sector, but to bring these issues forward into the sectors that deal with the human well-being aspect. For example, in the case of the Department of Human Resources Development, this is a very important area where one has to look at subsidies, the issues of the changing social net, and how money is being spent.

I'm going to come back to that point in a moment.

So it is not simply a matter of.... I shouldn't even say ``simple'', because it's a very difficult matter to address these concerns in relation to energy or agriculture, but we must also look at the very large expenditures that go into the concerns about the well-being of people.

I want to address some points of view from the business community, individual, and governmental perspectives, because we sometimes forget that we have friends out there who want to see change and we also have people who have a great deal of apprehension about ecological tax reform or whatever other name we might apply.

On the side of business, however, it has been seen that this kind of reform can lead to both enhanced opportunity and innovation. The guru of competitiveness, Michael Porter, for example, makes a strong case that regulations in general for environment do not hold back competitiveness, but in fact enhance it. The same would be true for market-based instruments.

The World Business Council on Sustainable Development promotes the concept of eco-efficiency and points out that the best way in which to bring it about is to create a flexibility in how business addresses environmental concerns, with end goals that are set by government. So it is opening up additional pathways. Green tax reform is very important for this.

At the level of the community.... This is a considerable concern to IISD, because it's clear that the overall burden of taxes, the overall burden of global change, and the presence in the agricultural sector, for example, of massive subsidies elsewhere create great difficulties for the community.

One of the points here is that communities are concerned for their aggregate economic opportunity. Many recognize that times will change and that there has to be the opportunity for innovation. As we deal with issue of green budget reform we must be very sensitive that we are bringing forward new opportunities for communities as a consequence of this type of reform, not reducing opportunities.

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Along with that, there's something my colleague Theo Panayotou would refer to as ``local betterment''. Many of these issues that relate to green tax reform and so on are in fact the interaction among local, provincial, and national levels of government, and communities are seeking betterment: better conditions, better opportunities for their own activities.

When we go to the level of the individual and address these concerns, as we all know, there's a great wariness on the part of individuals about any kind of new tax or any kind of additional tax burden. So it's very important that in thinking about green tax reform we make two things very clear. One is whether those new taxes are indeed going to replace another tax and therefore be a revenue-neutral kind of tax, and the second is, if it is a new tax for addressing a particular environmental problem, that there is a high level of accountability. People want to see that their money is going to be used in a way that is going to improve the environment and improve their well-being.

The third point about the individual is this point of a link to employment. I will just repeat what has already been said: tax not the economic goods but the environmental bads and open up new opportunities for employment. That argument is really just starting to be made in a cogent fashion, but it seems to me central to any kind of approach for acceptance of green budgets.

Finally, in the case of government, several arguments can be made of favour of this approach. One is simply the argument of efficiency in government operations. We can reduce the need for expensive and ineffective command and control by introducing some of these economic incentive approaches. That does not mean the end of regulation, of course. It means a revision of regulation and reducing the cost of enforcement, hopefully. I would again point out that some income support programs and so on should be examined in this light, particularly those that relate back to the resources sector.

There is an issue of efficient reduction in all of this. Subsidy removal is the clearest and perhaps simplest approach to this. But I would caution the committee to ensure that whatever their thinking evolves to on green budget reform, it is not seen as a new form of tax grab. I think that is a sure way to kill the issue.

What is also important from the point of view of government is to redirect limited funds to better ways of doing things. This brings out particularly one of the important aspects of how you approach this, and that is not to deal strictly with sectoral issues but with the intersectoral reallocation issues.

Finally in relation to government, as we are taking on various new kinds of international obligations that relate to climate change, forests, and trade issues, the green tax reform approach may be one of the best means, in fact perhaps the only means, by which we can fully meet our obligations.

What I would like to do is focus some of my discussion on what I call ``design and redesign'' issues. This is very central to the concerns we face. It is possible to use a very blunt axe when you remove subsidies or change tax structures. I prefer to think about using a scalpel, or maybe a laser beam or something like that. What we're not trying to do is simply to go in and say a subsidy is bad, therefore remove it and the world will sort itself out. There is a need to think what comes next. Particularly, we have to see how we can set up a good transition to make a politically and socially acceptable approach that still achieves the objectives.

One of the aspects of this transition certainly is when a subsidy is removed, or when a change is made. I'll give an example that I think is very instructive.

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The Western Grain Transportation Act was modified so that the Crow rate was removed. This was one of the major agricultural subsidies in the west. For I don't know how many years, it was a very political issue. People felt the world would come to an end if this subsidy was removed. Well, it happened to be removed at a time of rising grain prices. In fact, what I have experienced sitting in Winnipeg is that there's a great deal of enthusiasm for looking at the aftermath of this process. Many of the farmers recognized that they were indeed undertaking ecologically destructive processes in order to get the subsidy, and they were also oppressed because they had to grow grain and export it. Now new opportunities have actually opened up.

I don't want to approach this with glasses that are too rosy, but it is clear that there is a very constructive and creative aftermath to the removal of this subsidy. It highlights the points that, yes, there can be life after subsidy; and that, yes, this is the ideal time to be introducing efforts on sustainable development. For example, right now we are working with the Keystone Agricultural Producers Inc. in Manitoba to set up an adaptation forum. It represents 22 agricultural subsectors within the province. It is recognized that what comes after the removal of the Crow rate really has to be agricultural sustainability, and there's a great deal of interest in looking into the various aspects of this.

I would contrast, perhaps, the situation on the east coast of Canada and the continuing difficulty in the administration of the TAGS program. There is a large income support subsidy in place there, and I question whether this approach is indeed leading to the potential for sustainability. To me, these kinds of examples are the sorts of things we should be looking at in considerable detail to recognize whether we are indeed creating the right kinds of adaptation strategies in the implementation of subsidy policies.

Mr. Chair, we have also found in our agricultural work in particular - and I'll leave another paper behind called Sustainable Development for the Great Plains - Policy Analysis - that one of the nagging questions in all of the business of a baseline study is whether or not we have a good screening process. Can we actually state that a given policy is good for sustainable development, bad for sustainable development, or maybe neutral? Based on our own experience, I believe we can say, yes, we can do that.

We have to start with an understanding of principles. We need the kind of analysis that incorporates social, economic and environmental effects, and increasingly international considerations, but we've been able to do that. For example, when we screened the Western Grain Transportation Act through this, it was decidedly an unsustainable policy. It was very clear. When we looked at some other things, such as the North American waterfowl management plan, equally we could see benefits flowing to communities in a way that was very much a sustainable kind of a policy. We feel this kind of screening process could be handled in virtually any sector at this point in time, and indeed should be.

Some issues that I'm sure will come in the week ahead, but which I believe are important ones to address - particularly in relation to transition strategies - include the timing of any intervention in the situation. There have to be mechanisms in place, of course, to deal with political fallout, lobby pressures and so on, but the experience elsewhere has been that the political fallout does not seem to be nearly as severe as people worry about, and sometimes fret about, for decades even. By the same token, competitiveness links are also included. Many people fear we set ourselves up for being non-competitive, yet the evidence is just the opposite. And I think it is very fair to be concerned about regressive impacts and fuel tax and so on, but again there is experience that is relevant.

We have to worry about how we phase things in. The world does not have to change overnight, and in fact sometimes a shock treatment is certainly not the desired way to do it. I believe we also have to worry very much about jurisdictional issues and harmonization issues between federal and provincial interests. But it seems to me that these design issues, some of which are addressed in the book Green Budget Reform, are not issues that have to hang us up.

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If I could turn very briefly to what is taking place elsewhere, we are not at this point in time learning enough in Canada about the best practices that are in use elsewhere. These are documented. Some are in the United States, more are in Europe and, interestingly enough, some emerge worldwide even in developing country situations. I can think of some that relate back to agricultural pesticide and fertilizer subsidy removal. That is very interesting. Indeed, what I take away from very useful information produced in some cases by Canadians like Theo Panayotou, who works from Harvard University, or François Bregha, who has been assisting the national round table, and from that available in the OECD studies and so on, demonstrates that there is really an immense array of possibilities. We are not short on examples; it is hard to apply them.

I will echo again what Jim MacNeill said. It's our belief that organizations like IISD could be helpful to this committee, to the finance department, and to others in being a kind of clearing-house for some of this information, perhaps also bringing some of the people together from elsewhere in the world, particularly people who are working in Europe. That could include such people as those at the institute for tax and fiscal research in the Netherlands, or the Wuppertal Institute. Norway has a green tax reform commission. I think some of this experience is urgently needed in Canada in order to be transmitted to Canadians and to those who are designing our system here.

Finally, I would just like to make a few comments about the baseline study. First of all, we do need this benchmark. In my own experiences on this, I have been frustrated personally in in trying to have the right kinds of information available. As a member of the National Round Table on Environment and Economy, I've felt that our discussions on this subject would have progressed much more quickly had the baseline study been in place.

I do think there are bits and pieces, as David indicated, within departments. We're not starting from zero. The cup is in fact at least a quarter full. Over the course of this current fiscal year, I'd like to see if we could make it at least half full in terms of the information. This baseline study is urgently needed.

Some important points that are necessary to consider in it include, first, the framework of analysis. There is not a strong enough framework of analysis that I have seen yet within Canada, but I do believe there are enough people working on and interested in this that an adequate framework could be developed quite quickly. I think the work of this committee should stimulate thinking about that framework, and we would certainly be happy participants if further inputs on that subject are required.

Secondly, I think it is important that the baseline study addresses both sectoral and cross-sectoral issues, and that the issues within sectors be extended beyond the resource sectors and transportation to include things like human resources.

I also believe we have to account for the international influence in the baseline study, with some understanding of what is becoming common practice elsewhere. We must address front and centre the complex issues of trade and competitiveness, so it would be very helpful to have the Minister of International Trade as a friend in this process.

Finally, along these lines we must recognize the growing significance of international agreements and how they much relate to green tax reform.

In conclusion, I also believe it is important that we recognize this as part of the capacity-building exercise that was called for in Rio, and that all countries in the world have to go through. This capacity building starts in this room with our own parliamentarians. We certainly feel ourselves, as an analytical organization, very much caught up with that in terms of forming new ideas and bringing those new ideas from concept to practice. This capacity building, however, particularly has to go on in the interaction between the finance ministries and the sectoral departments that have an interest in this area.

So perhaps, Mr. Chair, I'll stop at this point in time. I think all three of us would certainly welcome the opportunity to answer questions from committee members.

The Chairman: Thank you, Mr. Hanson.

It's 5 p.m. Let's see if we can at least get in one good round of questions at a rate of one question per member. On va commencer avec M. Pomerleau, followed by Mr. Forseth, Mr. Adams,Mrs. Kraft Sloan and Mr. Finlay.

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[Translation]

Mr. Pomerleau: Thank you very much for your presentation. This is the first time that I attend a meeting that explains in detail a problem that I'm not very familiar with. Therefore, my question will be extremely theoretical.

You talked about the full cost pricing, which would include the environmental costs necessary for production of any manufactured product. You said that in the long term, the actual value of a product should reflect and include environmental costs.

In an international context of increasingly free trade, what would be the consequences of Canada adopting such measures but that they weren't also applied by its trading partners?

[English]

Mr. Runnalls: I think that's a very good question and not theoretical. The answer is, if we unilaterally implemented all of this at once it would have an effect on our competitive position. But other countries, particularly in terms of energy costs, have already gone much further than we have in building the cost of energy into the product. Our energy prices are still much lower than those of most other countries, yet they are competitive with us in the production of their manufactured goods.

This is obviously something that will have to go step by step. It can't be done all at once for inflation reasons, and for all sorts of other reasons.

Art mentioned a study done by Michael Porter, the Harvard competitiveness expert. Porter has now done several studies that estimate those countries with tougher environmental regulations actually have more competitive industries in those fields than countries with more lax environmental regulations, on the grounds that if you have a fairly tough domestic market you'll be able to sell abroad much more easily.

I would like to take one second to give you one example of what I mean by real costs. I just today received a report of a collaborative study I've been a member of, on transportation and climate change in Ontario.

We commissioned a study to estimate the real costs of automobile travel in Toronto. The estimate our study came up with for public transit is less than 1¢ per passenger kilometre. The estimate it came up with for the private car, when adding in the hidden costs of congestion, parking and so on, is 11¢ per passenger kilometre. So if you take the real costs into account, moving somebody around downtown Toronto in a car is 11 times more expensive than moving them by public transport.

We've made a series of recommendations in this study for beginning to include those sorts of costs in the costs of operating an automobile to get people to shift more to public transit. That would result in less congestion, less carbon dioxide emissions and probably a better performing city as well. That is probably a genuine win-win solution.

I should add, by the way, members of this collaborative included the vice-president of General Motors Canada, the vice-president of one of the oil companies, and a car dealer who actually sells cars for a living. They all basically subscribe to these recommendations.

I think we are now beginning to get a broader realization, at least in some areas, that we have to get these costs more in line with their true cost. But you're right that if we did it all at once we would be uncompetitive. It has to be done more gradually.

Mr. MacNeill: Could I add a word to that, Mr. Chairman? This is a complex question and has many facets.

I was the director of environment in OECD after the second oil shock. We followed the experience of a number of countries in coping with very high oil prices. Some shielded their economies from high oil prices, and one of the countries that did so was Canada, as you know.

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Our studies were very emphatic. They showed very clearly that those countries that maintained their tough environmental regulations and exposed their industry to high world oil prices did go through a short-term shock, but recovered very quickly.

Over a period of time, their industry was pressured into and succeeded in inventing a whole range of new technologies to deal with higher oil prices that would make them produce the same and better products with more energy efficiency and resource efficiency.

The industries in Japan, Germany and Scandinavia literally invented the new technologies of the 1990s. Those technologies gained market share worldwide. We saw it in the Japanese automobiles. We saw it in pulp and paper technologies. We saw it in food processing technologies. We saw it in steel technologies. We saw it in sector after sector.

After a short shock, which Canada shielded its industry from, the industry in other countries responded with innovation and dynamism. It developed the technologies that became new cost centres, export centres, revenue producing centres and so on. At the end of the oil shock, those economies were far more efficient and far more competitive internationally than the Canadian economy in that sector.

Most recently, Michael Porter of Harvard, in the Harvard Business Review has come out with a paper that reflects on that experience. It says, in a long way, what I've just said in a short way.

[Translation]

The Chairman: Thank you, Mr. Pomerleau.

[English]

Mr. Forseth.

Mr. Forseth (New Westminster - Burnaby): Can you also say whether the more efficient economies that did develop were directly attributable to the economic policies around energy, rather than some other intervening variables that may also account for those kinds of results? You're talking about something over here and a result over there. Are you controlling the whole paradigm?

Perhaps you can follow that up by being a little more specific on the $329 million of direct payments to the energy sector you talked about. We know what depreciation allowances and tax policies are, but what kind of thing could be suggested in the $329 million of direct payments?

Mr. MacNeill: With respect to what I said a moment ago, the studies of OECD studies in Japan and Germany and elsewhere suggest there was a complex of factors at work. But higher energy prices and tough environmental regulation were the two major driving forces in the phenomenon I described. Obviously there were sympathetic policies in other areas as well, but those were the driving forces.

With respect to your second question, I have the figures here. I'm sure the clerk can give them to you. This is an extract from the 1994-95 estimates of Natural Resources Canada. I'm not sure it's complete. Your baseline study, if it's undertaken, would be able to come up with figures that are perhaps more up to date and complete.

The kinds of direct payments included in the $329 million are Hibernia, $249 million; Lloydminster Heavy Oil Upgrader, $31 million; Interprovincial Pipe Line to cover deficiencies relating to the Montreal extension, $16 million; infrastructure costs off Newfoundland, infrastructure costs off Nova Scotia, and oil sands technology, $329 million. There are some other figures in there too. Nuclear power also received a subsidy in that year of $174 million. Other related subsidies were paid out in the energy sector; I referred only to the fossil fuels sector.

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This table is available from the Library of Parliament, and I'm sure you can get a copy of it.

The Chairman: Thank you.

Mr. Adams, please, followed by Mme Kraft Sloan.

Mr. Adams: Thank you, Mr. Chair.

Gentlemen, thank you very much.

Mr. Hanson, you refer to a ``what's the problem?'' kind of statement, and I look forward to reading that. We're very grateful to you for being here, but in this forum we're at exactly that stage. In other words, what's the problem?

Mr. Runnalls, you say we should be careful not to refer to subsidies but should perhaps refer to tax expenditures. I wonder if you could take the case of the grain subsidies, which sound to me like straightforward subsidies, and the case of supply management you mentioned, which doesn't sound to me as though it involves straightforward subsidies, and, if it's possible, walk us very quickly through those as examples of what we're talking about.

Mr. Runnalls: I'll try it very quickly.

The reason I said to be careful with the use of the word ``subsidies'' is, as you know, the subsidies are a major bone of contention in trade jurisdictional disputes. The very quick and dirty analysis is the following. Many of the pre-1995 budget subsidy arrangements for western agriculture were based on growing particular kinds of crops in particular quantities and transporting particular kinds of crops to the ports for export.

You'll see next week a man called John Girt, who's done a very interesting study on this. It essentially demonstrates that this leads to fence bottom to fence bottom plowing, the cutting of hedgerows and trees and the filling in of marshland. Two years ago we were at the stage where about 60% of rural incomes were coming from direct subsidy from the federal government, so farmers essentially had to grow what the programs were prepared to fund.

In the supply management scheme, I can give you a paper. It's a slightly more complex argument, but for example, under the Ontario agricultural regime, provincial sales tax isn't charged on pesticides or fertilizers. That essentially means you have very substantial use of both commodities by Ontario farmers.

Mr. Adams: But that's not supply management in itself?

Mr. Runnalls: That's not supply management.

I'll give you the paper and we can talk about it afterwards. It's a more complicated argument, and it takes a while to get through it. It's a paper called The Environmental Impact of Farm Support Policies in Ontario, and I can go through it with you later. I understand it vaguely, but I'd have to look at it better to really go through it properly. Essentially, by actually cushioning farmers against declines in prices....

We'll talk about it later.

Mr. Adams: Can you say, though, that the two forms of subsidies, if you view them both as subsidies, are equally damaging from the point of view of what we're discussing - that they produce a similar level of disincentive?

Mr. Hanson: Can I come in with one example? In this particular publication, one of the things we looked at was the egg marketing arrangements in the west. We came up with that as a neutral by comparison to, say, the Western Grain Transportation Act, which was definitely creating problems for sustainability.

If we looked at some of the other marketing boards, I'm not so sure what we would find. The important point is we should look at this as part of the overall baseline study.

Mr. Adams: Thank you, Mr. Chair.

The Chairman: Thank you, Mr. Adams. You have successfully managed to ask three questions instead of one, as usual.

Madame Kraft Sloan, followed by Mr. Finlay.

Mrs. Kraft Sloan: I was hoping to ask two questions instead of one.

Do you have some other examples of what some of the departments are doing around baseline studies? Someone had indicated in their presentation what NRCan is doing and a few things like that. As well, do you know if any other jurisdiction in the world has successfully undertaken baseline studies?

Mr. Hanson: All of us may have some points on this. Frankly, I don't want to speak for the departments. I'd prefer that they speak for themselves in terms of what they might be doing individually.

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In terms of what people are doing elsewhere in the world, I think we will see two kinds of activities that are very pertinent here.

One is that the example such as is occurring now in the Netherlands, Norway, I would say Germany as well, and several other European countries is highly relevant.

The second thing is that this is something that is now on OECD's agenda and it's very important that we stay tightly tuned into that. It's a very cost-effective way of looking at things.

The third thing we're undertaking through IISD at the moment, actually with money from the MacArthur Foundation in the United States, is that Norman Myers, who is a well-known person in the environmental field, is taking a look not in any specific country but worldwide at the issue of perverse subsidies. We hope that as the results of that become known we will get a good information base drawing from the UN system, the World Bank, which tries to monitor these things, and experience in different countries around the world.

This is particularly important to recognize, because when we're moving ahead on baseline studies, it's important to include what I'll call common practices - practices that might be fairly new but are evolving rather quickly in various parts of the world in addressing these issues.

My sense overall is that there is much more interest in this approach, for a variety of reasons, in virtually all parts of the world at this point and time. At this point we have a very active dialogue on this subject even within countries such as China.

Mr. MacNeill: If I could just add a word in response to the question, the assumption underlying it was that perhaps the departments do not have this information. I must say, as an old public servant from Canada and an old international public servant who has, as I said, worked with many countries, that I would be stunned blind if they didn't have the information. It might be that it won't be readily forthcoming in all cases, but between the Department of Finance and the sectoral departments, information on direct subsidies, tax expenditures, and fees and charges of all kinds for all purposes must be available. This is not Zimbabwe. Excuse me. This is Canada, and I'm sure that the information is there. The question is how to get at it.

Mr. Runnalls: Could I just quickly point out, in response to Art's point, that for those of you interested in reading some more about this, the World Resources Institute in the United States has consistently over the last seven or eight years taken apart a number of sectors in the United States in exactly this way. They've done an excellent study of U.S. agriculture and U.S. agricultural subsidies, which are infinitely more complex and varied than ours. They've looked at energy subsidies in the United States and at implied subsidies for the use of national forest land, and done so from the outside, from the point of view of a policy research institute acting on the basis of published information.

These are complex areas, but they are not by any means impossible, as we can see from the NRCan study. There is a lot of experience both in western Europe and in the United States in taking these sorts of problems apart and analysing them.

Mr. Finlay: I've been very interested in everything you've said. In this environment committee we've been quite aware that we're going to have to get to green accounting sooner or later. You've certainly given us some very good information and a boost in that direction.

My question follows from Mrs. Kraft Sloan's. You said that we need this baseline study urgently. From what you've just said, I gather that the information is there and it's a matter of (a) will, (b) time, and perhaps (c) money. How much of those things will it take in order to get this done for the federal government?

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Mr. MacNeill: That would take more thought than I can give to it in the next few seconds.

Depending on how you approach it and structure it, it should be possible to do it within a very reasonable period. I would urge you to guard against over-complexifying the issue. David showed you the tables from the NRCan study. They were lucid and clear. The other departments should be able to provide similar information in a very reasonable period. If you subject that to professional analysis by competent people to produce a report, you should be able to do that in reasonable time too.

I don't think you're talking about something that is either very costly or very time-consuming. It's quite practical and you should be able to get some useful results in a reasonable period.

Mr. Hanson: I agree with what Jim has said. If we had to put parameters on it, I would like to see the baseline study completed within a year. That will produce a set of issues, I'm sure, that will bring on a need for further analysis.

The learning curve on this could be very rapid. It does require, as Jim pointed out, good analysis. I think what we want to ensure is that the analytical capability is in place and that the framework for doing the study is agreed on early on.

Mr. Runnalls: Sorry to belabour this, Mr. Chairman. I think that was a very good question.

The study of U.S. agriculture that was done by the World Resources Institute was done by a man who used to work for me. I think he did it in about seven or eight months. He did it more or less on his own, obviously with the help of some research assistants.

This will cost time in personnel terms, but it's not the sort of thing that should cost lots and lots of money for people to fly around, use expensive equipment, or anything else. Again, most of this analysis of the U.S. economy was done by a policy research institute whose total budget is no more than $15 million a year. They certainly didn't spend any more than a fraction of that on any one of these studies.

The Chairman: Mrs. Payne.

Mrs. Payne (St. John's West): Thank you, Mr. Chairman. I thought maybe you were going to penalize me for being late.

The Chairman: I wouldn't dare.

Mrs. Payne: I'm a member of Parliament from the east coast; from Newfoundland, in fact. I was very interested in the comments you made about the subsidization of the fishery. I think most of the people - and you may be surprised to hear that - who are involved in the harvesting of the fishery in Newfoundland were in fact against subsidization also. The problem we faced was that those who were not involved in the fishery at the time wanted to get involved because of the subsidization. Hence the numbers we face today, and hence the problem with the TAGS program, or at least some part of the problem.

I wanted to ask you this, though. At the time the subsidization took place, there were two reasons. One was the political reason, in that politicians wanted to create employment. The other one was that we were faced with foreign fishing efforts. These countries were subsidizing their fleets, and building larger and larger fleets with better and better technology. I'm wondering if you could comment on just how we deal with that kind of situation.

Mr. Hanson: What you say is very true. We have to look at the lessons of the past but look to a future that's different, it seems to me. My concern for the future is that if we have indefinite income support programs that have very little light at the end of the tunnel, then we are creating a new kind of subsidy that is perverse in its own right in terms of what it does to people and their longer-term possibilities.

I see a future, if we look a little beyond the current situation, where aquaculture will have to play a larger role, for example, in employment within Atlantic Canada. There are opportunities for investing in new forms of activities, such as ecotourism. To me, the striking use of the ocean on the west coast, which has its own problems, and the east coast involves the fantastic new opportunities arising in ecotourism. Many people are involved in that. There is at least some potential of that in Newfoundland, and certainly in Nova Scotia and elsewhere.

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Third, to address the point you make about the foreign fleets, this is clearly a combination of law to prevent a kind of situation from reoccurring. I think we see this now a bit with the new international acceptance of the straddling stock situation, for example.

My own sense is that the kinds of subsidized investment in these large fleets, wherever they are in the world now, is eventually going to drop off. I think it will have to come about, otherwise we will simply not see the sustainable use of the ocean.

In Canada, I think it's clear that we're just simply going to have to keep subsidized large vessels away from the stocks when they do start to return; otherwise we will find ourselves in exactly the same position, whether or not we have subsidized fleets of our own. I'm struck by the likelihood that we will simply not have a large-vessel fleet perhaps in the future on any kind of scale as we've had in the past.

Mrs. Payne: Thank you.

The Chairman: Mr. MacNeill, did you want to say something?

Mr. MacNeill: Mr. Chairman, I want to say that I unfortunately have another engagement at 5:45 p.m., so I have to leave. But my colleagues will remain.

The Chairman: We are also anxious to hear Mr. Boutros Boutros-Ghali at the centre at 5:45 p.m., so we will be joining you very shortly. In the meantime, thank you very much.

Mr. Wappel, do you have a brief question?

Before launching a brief second round, could you please answer this question as keen observers of the political scene? Could you explain to us what happened all of a sudden one year after the introduction of the GST when the item of pesticides was exempted from the GST? What led to that decision, in your opinion?

Mr. Runnalls: I haven't the faintest idea, Mr. Chairman. I really don't know. That's not something I know anything about.

Do you?

Mr. Hanson: No. I have not studied that specific issue, so I wouldn't want to react.

The Chairman: All right. Thank you.

Second round, Mr. Pomerleau, Mr. Forseth.

Mr. Forseth: I'll make the comment that essentially what you've said about the eastern fishery may apply to the west coast. It's just a comment that we shouldn't necessarily be building fish boats; we should be building gunboats. There's a serious implication to that for where our emphasis should be.

Mr. Hanson: The emphasis should definitely not be on subsidizing any fish boats, for sure. We should be encouraging people to move into alternative livelihoods and addressing some difficulties with the past that have been created by the entry into the fisheries.

If we build gun boats, we certainly need to build stronger international regimes to deal with the problem. That's point number one. We need a capacity to not only act responsibly ourselves, which I think is the most critical aspect of this, but to be impeccable in our own actions. Then we have to be prepared to recognize that if others are not going to act responsibly, we have to bring about pressures for them to do so to change their behaviour. There's no question that the health of the resources should be a very high priority on the west coast.

The Chairman: Mrs. Kraft Sloan, please.

Mrs. Kraft Sloan: I believe Mr. MacNeill had spoken earlier about sectors that had done better in job creation and in financial areas because they had gone into eco-efficiency and things like that. I wonder if you could name some of those sectors.

Mr. Hanson: Very specifically, if one looks at the case of Germany, it has prospered because of its early introduction of eco-labelling and recycling. It's created a competitive advantage, in which there are now many new sub-sectors occurring within that. occurring.

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Look at the situation in Canada in relation to the environmental industry. That is one area in which it is very clear that it's, as some people will say, a sunrise industry and one that's equal in terms of its employment efforts now to the scale of the pulp and paper industry. So we need to watch that one very closely.

Let me give you one example that I found very instructive in the last year. I was involved with the selection of awardees for the safety, health and environment awards for Dupont in its worldwide operations in this last year. I was struck by, first of all, the fact that they had many interesting examples in which they were trying to bring eco-efficiency into their operations. They were trying to take a waste product and convert it into a useful product. They a put tremendous emphasis on the marketing of that, which is sometimes a very difficult thing to do.

But the one case that stood out above all the others was a plant they were building to process some form of metal in Taiwan. They had a number of these plants around the world. This plant was started in a very difficult environmental situation in communities that were very concerned because of past pollution by a variety of business concerns. They were able to bring the thing on stream in good time with absolutely no safety or health problems. They had a very complete environmental management system.

The interesting thing about that plant was that it turned out to be the most efficient plant in terms of its productivity - this is what was actually being produced in the metal - of any in their whole world system of similar industrial plants.

That taught me something about this kind of win-win-win situation that you can develop.

Mr. Runnalls: The classic example of this that everybody holds up is 3M. As a company, 3M has had a thing for years called the ``three-P'' program, or ``pollution prevention pays''.

They've been adding up the savings. In fact, there have been not only employee awards, but employee rewards for this. The last time around they had gotten up to $4 billion in terms of adding both the savings they had achieved through the implementation of the program, and also some new market areas.

I'll give you one other quick one. This was something I was told as an interesting anecdote of what can happen unexpectedly.

One of the Canadian chemical companies - it's too bad Peter Adams isn't still here - decided to overachieve the provincial standard on SO2 emissions. In the process of doing that - they did it to improve their public image - they discovered they had invented a process for extracting SO2 from stacks that produced the purest form of sulphuric acid they had, which became the company's major cash earner, as a product. So you got a ``two for''.

There are lots of these around. We could probably even give you some references to it. It's becoming commonplace in some sectors. In fact, companies can actually measure and say that because they did this and this and this, they saved x and y and z and developed the following two or three new product lines.

Mrs. Kraft Sloan: I have one quick, small question. I think all of the witnesses have basically touched on this: we can't do this overnight; we have to move in phases.

I'm just wondering if there are priorities. Where should we go first, in a broad way?

Mr. Hanson: Clearly, if there's a sense of public acceptance and political acceptance that the time is right, then that should obviously be a priority.

Second, it seems to me that for some of the initiatives.... I would say the Newfoundland fisheries income support program, which has a sense of urgency about the future design of that kind of activity, should be another important one.

Third, I would not like to see the committee lose sight of the positive environmental aspect as well if, in other words, there is a case for something that relates back to the forestry, agricultural or energy sectors in which there can be a demonstration value. That's one of the important lessons of this book. As for these 22 or 23 cases in here, there's usually a demonstration value to them, and we should not lose sight of that. If something can be made to work, people will want to follow up on it and maybe apply it in their own jurisdiction or sector.

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The Chairman: Mr. Finlay.

Mr. Finlay: Mr. Chair, I discussed this with Mr. MacNeill briefly but I'd like to ask these gentlemen. It follows from the east coast fishery.

I heard a report last week that a professor who has been working with whales and communicating with them declares that the whales have told him that the loss of the fishery on the east coast has nothing to do with technology or overfishing or fishermen. It has all to do with the temperature of the water, which prevented the production of the number of capelin that had previously been produced. I suppose you get these kinds of things. I don't know whether you've heard of it, but I wonder what your comment would be.

Mr. Hanson: I'll answer that one as a fisheries ecologist. I spent fourteen years living on the east coast of Canada when I was at Dalhousie University as a professor. When I first moved there as an ecologist, for the life of me I could not understand why a major fishery was developed on the capelin, because capelin was a food source for cod, whales, and other things. It just seemed to me so counter-intuitive that I could never understand it, and to this day I do not understand it.

My second point is in relation to the issues surrounding the water temperature hypothesis. I'm certainly convinced that something more than overfishing is involved. The X factor must deal with water temperature in some way.

The important point of all these things is the interaction amongst them. It's the interaction among perverse subsidies and among foreign fleets and domestic fleets. What we have assumed we were doing was managing safely within some bounds, but we weren't really. So along comes a fluctuation in water temperature and we've got no fish.

The same thing happened off Peru in 1972 with El Niño. There was a huge build-up of a subsidized fishery on that coast; in fact, it became the world's largest fishery. El Niño came along and the poor little anchovies just disappeared.

The Chairman: Mrs. Payne.

Mrs. Payne: Thank you. Mr. Chairman, I did want to respond to the comment by Mr. Finlay and the answer to it.

In fact, again I think most fishermen will agree with the comment you just made about the food chain. The whales do depend enormously on that particular species of capelin. The comment you just made with regard to the further destruction of the species by the temperatures of the water has been borne out in a number of other studies too, I think.

The fishermen in Newfoundland are now pleading with politicians not to have any further capelin fishery. I don't know; I'm one politician among the crowd who says there should be no capelin fishery, but I think your comments on that are very timely.

Mr. Runnalls: Could I just come back on that, Mr. Chairman? Earlier Mrs. Kraft Sloan asked a question about timing, and Mrs. Payne just answered part of it.

I think a lot of people in the natural resource industries are very discontent with the present situation and realize that for all kinds of reasons the subsidy system is going to have to be dramatically modified. I've spoken to groups of farmers in Ontario, I've spoken to groups of farmers in the west, I've spoken to people involved in the fishing industry, and lots and lots of people have said the same thing; this is a system that is broken and needs to be fixed.

While I think there'll be a lot of political noise at the beginning if subsidies are cut yet again, I think there's a much greater degree of understanding of these issues and the need to deal with these regimes amongst the people operating in the natural resource business than we give them credit for.

The Chairman: To conclude, I have a question that will be very helpful to the committee as a whole in preparing our report. I wonder whether you, Mr. Runnalls or Mr. Hanson, would like to indicate to us which would be, in your opinion, the kind of process that ought to be designed in order to achieve a comprehensive and consistent baseline study. How would you go about it?

Mr. Hanson: First of all, it seems to me that involving the finance department officials is a very important element of this. Secondly, it should take into account work of various groups that is in existence already. Certainly the national round table is very interested in this, IISD, the Pembina Institute, and others.

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My concern about the design of it is that it should not become a forum for every opinion on this subject that exists in Canada. This is a problem of the design of the task force that concluded its work a year ago. That does not mean those views cannot be entertained, but the design of this has to be strong analytically. It has to be believable.

The next point I believe is important - I'll just reflect what Jim MacNeill said - is that we believe the information in fact is there. It's a question of getting that information together. It's almost inconceivable that the departments, in their efforts to do budget-cutting, have not carefully considered many of the subsidy issues. My concern is whether they have considered them in light of sustainable development and have considered some of the options that might be available to them for modifying subsidies so they become environmentally positive as opposed to environmentally perverse.

The next point, I would say, is that the study should have a beginning and an end, clear terms of reference, and operate in such a fashion that there would be expectations that it would be completed, I believe, within one year's time. To allow it to go on longer than that would lose the opportunity to implement it within the current mandate of the government.

The final points I would raise - I could raise many more and would be happy to follow up individually on this with anybody interested - is to establish this analytical framework early on. That could be done with a relatively small group of people who have been thinking through the issues in the Canadian context and monitoring activities internationally. I believe that should be done within the next few months, if at all possible, and possibly even stimulated by the work of this committee. It's been a stumbling-block because people have felt it was an overwhelming task and it was a task that seemed to have no end. I think we could address those issues.

Finally, the reporting mechanisms: who is going to be interested, how is the information going to be used, and what are some of the institutional and political blocs once the information is actually produced? Those questions should be addressed as part of the terms of reference, but in a strategic sense the question asked about how this information would be valuable, for example to the finance department as it prepares to respond to the commissioner on environment and sustainable development, once that office is established...and certain other strategic questions like that.

As far as I can see, to this point the strategic issues have not been really well thought through in relation to the baseline study. At the end of the day I would very much like to see that the baseline study had a ready audience and an audience that could take the results and put them to good use in bringing about green budget reform.

Mr. Runnalls: I'm conscious of the time, Mr. Chairman. I'm a bit more iconoclastic. I would get on with it. I think striving for total consistency may be more than the world is likely to deliver. There will be a tendency by everybody to try to complexify this beyond what it should. I think, although I haven't read it all, we have a good start in the level playing field study NRCan has done. I would put my foot down a little harder, because otherwise I think you will find it drifts and drifts and drifts.

At the end of the day it may be that the baseline study is to a certain extent an accumulation of individual studies done by individual departments. Provided these are robust and somebody has looked at the methodology and they are transparent and not done in the back room, I suspect that may be the best way to proceed in order to get something done fairly quickly.

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I would strongly urge you, Mr. Chairman, not to let perfect become the enemy of the good in this. I can see this becoming a kind of classic Ottawa log-rolling exercise, and we'll all be sitting here in the year 2000 waiting for the delivery of the study because somebody has got hold of it and is trying to make it absolutely perfectly consistent among departments A, B, C, and D.

It's quite obvious from the testimony, and from the work you've done, Mr. Chairman, that the immediate problems are in the fields of energy, agriculture, forestry, and fishing and that there are additional problems beyond that. If one could make major progress on those traditional sectors quickly, then one might begin to influence what the Minister of Finance has to say in 1996 rather than in 1997.

You might want to think about the alternatives of not waiting for a baseline study but beginning to encourage, seduce, persuade, in your inimitable fashion, different departments to get on with it. Otherwise, I think you'll get the centipede phenomenon, in which the whole process moves at the speed of the slowest leg.

The Chairman: However, you agree that it would be best if the methodology were the same in every effort. What would be your quick set of instructions to those in charge of methodology?

Mr. Runnalls: That's a longer question than I think I can answer between now and the time when you will hear the secretary general. As Art said, I think we might be able to give you something in writing. We can't give you a methodology, but we might be able to give you something in writing that will give you a sense of the appropriate rigour for these studies.

Mr. Hanson: Definitely. I agree on that.

I basically agree with what David has said, as well; that is, we shouldn't let the perfect get in the way of the good. In the first round of doing this we will find so much that will be helpful that I don't think we should make our methods too complex.

Some thought has been given to this. For example, in the task force a year ago there was a first look at methods. I felt that what came out might be too complex, actually. My belief is that if we set our minds to it, before Christmas we could have methods that would pass good scrutiny.

The Chairman: Your answers and your interventions are very helpful. On behalf of my colleagues, I thank you very much indeed for coming and for the substantial contributions you have made.

This meeting stands adjourned.

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