EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 28, 1995

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[English]

The Chairman: Good morning. Bonjour, mesdames et messieurs.

We are continuing our work in the form of a forum examining fiscal disincentives to sound environmental practices in the search for approaches to fiscal policies that would move us in the direction of sustainable development.

As you have noticed yesterday afternoon and last night, the work we are doing is rather complex and we are moving into partially uncharted territory. What we are looking for is a basis for solid decision-making, to see which tools available to government - be they subsidies, or tax incentives, or the tax structure - lead to unsustainable practices, and having identified them, how we can replace them with sustainable tools.

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In order to achieve that, of course, we need reliable and solid research by government departments, and we need it soon in order to make this exercise meaningful for budgetary purposes. If you are committed, as this government is and as I trust everybody in this room also is, to the concept of sustainable development, this is a task of major importance. As we know, it has been achieved and it is being implemented in other jurisdictions, in countries such as Holland, Denmark, and Germany. In North America, perhaps we would be the first jurisdiction moving in that direction.

There were some elements related to sustainability in the last budget already. We would like to encourage the government and make it possible for the government to move further and on a broader basis in that direction.

With that very brief introduction and urging to the members present in this room to keep that in mind in their questioning today, let me call on Mr. Miller to introduce himself and then perhaps launch the other speakers in whichever order he chooses.

As you intervene, would you mind briefly introducing yourselves and making a brief presentation so as to allow for the longest possible exchange by way of questions and answers.

Welcome, Mr. Miller.

Mr. George Miller (President, Mining Association of Canada): Thank you, Mr. Chairman. My name is George Miller and I'm the president of the Mining Association of Canada.

I have with me a colleague, Robert Keyes, who is the vice-president of economic affairs for the association. The other panellists are Barbara Campbell and Keith Brewer. Ms Campbell will speak after the Mining Association. Dr. Brewer, who is a representative of Natural Resources Canada, will speak after that.

Before I make my prepared remarks, I would like to note some documents I have tabled with the committee. The first document is the new environmental policy of the Mining Association of Canada. It represents a plain-language commitment from the member companies of the association to carry out their work in the most environmentally benign way possible.

The second document is the result of a voluntary commitment to reduce emissions of certain toxic materials. The base metal industry in Canada has undertaken to reduce the emissions of the substances listed under ARET, by no less than 71% over the period from 1988 to the year 2000.

The third document I wish to table is a little more hefty than the other two. The Whitehorse Mining Initiative Leadership Council Accord represents a multi-stakeholder consensus that charts a new future for the mining industry of Canada. This was the result of a two-year consultation, involving aboriginal peoples, environmental groups - of which Ms Campbell was a leader in this exercise - both levels of government, the mining industry, and the labour movement. You will find in this document some 16 agreed principles and 69 goals towards which the mining industry and all of the other participants in the initiative are working. We regard this as a new strategic vision for the Canadian mining industry.

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Mr. Chairman, our association is pleased to be here to contribute to your discussion of the tax system. You have asked us to consider several questions. It's a very ambitious undertaking to try to deal with them in the timeframe allotted to us, but we will be as helpful as we can.

I would like to start my remarks with some observations on linkages. The topic at hand involves the relationship between environmental policy and fiscal policy as levers that can help fulfil the goals and expectations of society.

But there are also linkages between policy and global economic realities. Fiscal measures cannot be taken in isolation from the competitive and economic framework in which industry finds itself, both inside Canada and as part of a world economic system. For a globally oriented industry such as mining, this is especially true.

Our industry competes worldwide for markets, investments and jobs. Higher costs of any kind imposed on Canadian firms, including fiscal charges of all kinds, cannot be passed on to our customers because prices for our products are set in the international market place beyond our control.

Economic and environmental policies must continue to evolve. This is how progress is made. In our view, however, significant changes in the fiscal environment must be made with due regard for the competitive environment for Canadian mineral development and production.

The nature and pace of change must be geared to Canada's capacity to absorb it. Rapid and severe policy change risks creating considerable economic dislocation. We operate either as individuals or companies under a complex tax framework.

The existing structure is a cumulative product of many measures instituted by governments for various policy purposes. In the case of mining, the particular features of the current tax system reflect the risk and the economic characteristics of the industry. They have not been inserted arbitrarily or at random. Moreover, those features are in place to provide a tax regime that allows Canada to attract its share of world mining investment and to generate the jobs and incomes Canadians so badly need.

There's another factor which I should mention. The current system is closely linked to provincial, corporate and mining tax regimes and to non-profit taxes and levies. Together, this integrated scheme cannot be radically changed to accommodate a new objective without significant consequences.

Before I turn to the questions put to the witnesses by the committee, I would like to illustrate several important principles by commenting in some detail on one particular objective: the potential for greater recycling and the role of the fiscal system in achieving such an outcome.

The report of the Task Force on Economic Instruments and Disincentives to Sound Environmental Practices recommended that the federal government examine the treatment afforded by the tax system to virgin as opposed to recycled materials. This recommendation was based at least in part on a report undertaken by Jack Mintz of the University of Toronto for the Canadian Council of Ministers of the Environment.

We have many comments on this paper, but I am just going to make three observations.

First, the issues raised in the paper are complex. Unfortunately, academic and model-based studies are unable to deal with the full range of real world complexities. Moreover, accounting exercises, which attempt to represent a single tax burden by aggregating diverse elements of the federal corporate, provincial corporate and mining tax systems can only be applied to the particular set of assumptions that frame the work. In doing so, the actual functioning of the virgin materials and recycling sectors is very difficult to represent accurately.

Second, the risk functions of respective industries cannot be ignored in the analysis of fiscal systems because it is exactly the risks and characteristics of industries that are responsible for the way in which they are treated by the task system. Consider only two examples.

The recycling industry does not have activities or processes comparable to the high risks and low success ratios of mineral exploration. Consequently, no part of investment in recycling receives similar tax treatment to exploration spending.

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Furthermore, unlike investment for plant and equipment in the recycling industries, resource development investments often do not result in the creation of a marketable asset. For example, if at the end of an operation a mine shaft or a pit is reclaimed, it is not put to other economic uses. By contrast, the land, buildings, and equipment used for a recycling operation in an urban area might well be sold for another use.

Special mineral-related provisions in the tax system reflect these realities. That's why they're there.

Third, the Mintz report, like other academic reports, approaches business investments from the perspective that a dollar is a dollar, no matter what the nature of the investment. This does not fit with either tax principles or tax practice in Canada and around the world. A dollar of investment in mineral exploration or development is not the same as a dollar spent in a recycling plant, because of the very different characteristics of the two industries.

Moreover, the impact of such investments and expenditures is difficult to compare. For example, which expenditures, in which sectors, create the most significant regional benefits?

However, such impacts may well affect how various activities are viewed by the economic policy system, enhanced by the tax system, as an instrument to realize economic policy goals.

The capacity for multiple recycling or repeated recycling of metals is a vital characteristic that distinguishes metals from other so-called non-renewable resources. Because of this characteristic, some have described metals as the ultimate renewable resource.

Recycling is therefore a key element of sustainable development, but recycling is not an end in itself. It satisfies both environmental and economic goals. It is part of a complex system of industrial supply that includes virgin and primary materials and secondary materials. It is an activity that makes both environmental and economic sense.

I want to make it clear that our industry supports recycling. Indeed, several Canadian producers of primary metals are also in the recycling business. At present, scrap material accounts for some 25% of the feed for certain Canadian smelters, a figure that continues to increase.

The committee might be interested to know that in North America well over half of all steel and lead that is put in use today is derived from secondary sources, and the proportion is still increasing. For the four major non-ferrous metals - aluminum, copper, lead, and zinc - the proportion of world supply of refined metal that is met from recycled material has increased by 40% in the past 25 years.

Moreover, the current apparent recycling rates understate the actual extent of recycling, because of the large and growing inventory of metal in use. We are today recycling materials that were put into use as much as several decades ago, when consumption was much less than at present.

Similarly, industrial or consumer goods produced from virgin or recycled material today become part of a stock that may not become available for another cycle for many years into the future. The copper wiring or piping in our houses may be in use for 60 or 80 years. This material is not lost to society, but is temporarily removed from the marketplace.

Increasing the extent of recycling will depend on a host of factors, including metal prices, the cost of collection, and so on. Indeed, institutional factors, such as the availability of gathering systems for recyclable material, may prove to be far more important than tax-related considerations.

Let me conclude my thoughts on recycling with one final point. However closely we approach complete recovery through recycling, some virgin material will continue to be required as long as the world's economy is growing. Therefore the tax system has to treat both activities, primary production and recycling, fairly.

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Approximately 85% of Canada's mineral production is exported. We are the world's largest traders of minerals and metals, an activity which means jobs and income for Canadians.

An increasing world population is fueling a growing demand for resource-based products. Penalizing primary producers in Canada through the tax system will not lead other countries to decrease their consumption of metals. They will merely fill their needs from non-Canadian sources. Should it be our policy intent to deny Canadians jobs and income from these export opportunities? I think not.

With equitable tax treatment, Canadian industry can continue to increase the share of recycled materials in the mix, fulfilling Canada's needs and export opportunities with both recycled and virgin materials.

I will now turn briefly to the questions posed by the committee. Your first question involved the interrelationship between the federal fiscal regime and the environment, the fiscal system being seen as a barrier to the implementation of sound environmental practices. The wording of the question appears to invite a response of yes, but our industry's experience is that there is no such barrier.

Our sector has continuously improved its environmental performance and it will continue to do so. This is demonstrated in the actions of individuals, companies, and the industry collectively. The members of our association recently updated and strengthened their commitment to environmental excellence in the form of a new environmental policy for our association, which we have tabled today.

We fully support the integration of the economy and the environment as the basis for sustainable development. Moreover, individual companies are demonstrating their commitment to environmental performance through new investments, new goals, and new results. Finally, we are participating in a variety of voluntary actions in various areas. So does the current system pose a barrier? Absolutely not.

Your second question involved data gathering. Collection of a broad range of background information is difficult, as is the interpretation of the data obtained. What is a polluting activity and an unsustainable practice? What factors would such data assess? It is not clear to us what the objective of the exercise would be, especially when there is a significant degree of subjectivity in the expression of the objectives.

The collection of environmental expenditure data by statistical authorities, including Statistics Canada, is currently in its infancy, and it is proving difficult to do on a consistent basis. Some costs may easily be identified, but many others are integrated into production or process investments. They may have considerable environmental benefits but will not be identified as environmental expenditures.

It is an area which is going to require considerable experimentation before the results are truly useful. In my view, it would be most useful to examine sectors on an individual basis, identify the unsolved environmental issues or problems, and assess how the tax system affects those problems or could assist in their solution. In other words, it's a more targeted approach to the solution of problems.

In response to your third question, I do not believe there is an urgent need for federal fiscal reform to the regime affecting mining in order to protect the environment. Economic instruments may prove useful in replacing or supplementing command control or end-of-pipe regulatory approaches, especially if they can produce more result-oriented outcomes.

However, notwithstanding the many ideas for economic instruments, their practical application has been slow in coming in Canada. In part there has been considerable caution, because Canada's global linkages require that unilateral action, which puts us at a competitive disadvantage, would be short-sighted. We must not shoot ourselves in the foot, especially at such a critical time for our economy, which is struggling with a large amount of debt, both consumer and government.

Concerning your fourth topic, the level playing field, I have already discussed our thoughts on recycling and the equitable treatment of virgin and recycled materials. I would only note at this point that the level playing field may be an abstraction akin to a laissez-faire approach to the economy and to economic management.

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Neither of these is observable anywhere in practice. Canada's economic and policy history suggests that governments are unlikely to take either approach. Moreover, because the federal fiscal system is so inextricably linked to provincial economies, it would be difficult to establish the hypothetical level playing field in practice.

Your fifth and sixth questions seek concrete suggestions for removing federal fiscal disincentives. One idea our industry has advanced along these lines is for a financial mechanism to encourage the use of mine-reclamation trust funds through a tax deferral on earnings of moneys set aside for reclamation. It's very similar to an environmental pension plan.

I can go into this mechanism during the question period, if committee members wish. To date, however, the government has rejected this approach. We think that it would have application to various industrial sectors, with consequent benefits to the environment and to society.

In general, however, we do feel that rather than completely reworking the fiscal system, far more effective benefits to the environment and the economy could be obtained if governments implement a regulatory framework, which maintains high standards, but which eliminates federal-provincial overlaps and minimizes delays and increased costs. We believe this should be a high priority.

We all seek environmental improvements and these are occurring across the mining sector. Steady progress has not depended on special fiscal measures, and I believe it will continue and accelerate. My members and I do not believe that the current fiscal system is in any way leading to unsustainable practices or is inhibiting the implementation of sound environmental practices.

We are certainly willing to consider how economic instruments or fiscal reforms might be used to supplement regulation, but we cannot tolerate the undermining of our economic competitiveness. This would be a short-sighted approach, which would cost Canadians dearly.

Mr. Chairman, I've touched on only a few aspects of this very complex subject. I'm sure that in the short time that your committee has given itself to consider the subject, you and your colleagues will find ourselves equally challenged, but no doubt you will prove equal to the task. Thank you very much for your attention.

The Chairman: Thank you, Mr. Miller.

Who is next? Please go ahead.

Ms Barbara Campbell (Principal, ECO PLUS Consulting Services): Good morning. I'm a management consultant on the environment and economy. As George Miller mentioned, I was part of the Whitehorse Mining Initiative, as part of the finance and taxation issues group. I've also participated in the British Columbia Mine Reclamation Security Policy Task Force and assisted with the study on energy taxation that was mentioned yesterday, which was done recently for the national roundtable.

I'd like to begin by thanking this committee for convening this forum. As a management accountant, environmental advocate and taxpayer, I agree that it's important to look into fiscal disincentives to sound environmental practices.

I believe we need better and more complete information on which to base our decisions, particularly in the resource sectors such as mining, forestry, agriculture, energy, as well as transportation. That's why the discussions within this forum and the work that will follow are so important. We need to know what the public investment is in mining and other sectors, and what the public gains and losses are from that investment.

By generating, updating and making known these factors, we can then make better-informed decisions based on public priorities. So I applaud the initiative to proceed with a baseline study.

I've organized my discussion on the basis of life-cycle stages of mining, which for today I have categorized as first, the demand for raw materials and products; second, site selection; third, exploration and development; fourth, extraction, mine operations and processing; and fifth, reclamation, closure and perpetual care.

For each of these stages I'll provide examples of the activities related to mining and their environmental impacts, public investment in each of these stages in terms of government program spending, tax expenditures and the like, relevant baseline data that would support informed decision-making, and suggestions for fiscal redirection toward incentives for sound environmental practices.

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First, I would like to put forth five principles for combining sound environmental and fiscal management of mining. These serve as a basis for my assessment of the existing fiscal regime's influence on sound environmental practices and for the way, as I suggest, we might redirect our fiscal regime.

First, the extraction of virgin raw materials should occur to satisfy a real demand that cannot be satisfied at lower full cost to the environment and economy by reducing, reusing, recycling or substituting.

Second, opportunities should be taken to avoid and lessen the damage or the risk of damage to the environment, health and safety, placing a high priority on prevention rather than experiencing the damage and attempting to remediate.

Third, environmental costs should be included as costs of doing business. If such costs make a project uneconomic, then indeed it is uneconomic from a full cost standpoint, including environmental costs.

Fourth, the exposure of the public purse to the financial risk of having to pay for contaminated site clean-up should be kept to a minimum.

Fifth, sufficient funds to return the area of disturbance to a self-sustaining ecosystem should be available at any stage in the life of the mine to ensure that the site will be reclaimed even in the event of premature mine closure or bankruptcy.

Stage one is the demand for raw virgin materials and products. The main impetus for mining is to create economic activity by satisfying the demand for materials and products derived from minerals. Activities at this stage of the life cycle are not mining activities per se, but include research, marketing and promotion of Canadian minerals and products. These activities do not in themselves cause much environmental impact, but the eventual purchase and use of the goods does.

In addition to the impacts of mining and processing, environmental impacts of using more raw materials and products include the air pollution, for example, from burning coal and other mined fuels and the additions to landfills through disposing of products. You might say that this is at the end of the life cycle, but indeed it is a cycle precipitated by the original demand.

The public investment in generating demand for raw materials and products is in the form of government participation in international trade activities to promote Canadian materials and products. It appears that a large part of the 1995-96 allocation of about $7 million to NRCan's mineral and metal commodities and economic and financial analysis activities goes towards this stage.

The recent study for the CCME, lead by Jack Mintz, which George Miller discussed, did conclude that in the case of fabricated metal, the effective tax rate on recycled material production is 4.5% higher than for virgin material, another possible example of public investment.

Appropriate baseline data would show how much direct government spending and tax expenditures are going toward promoting virgin materials and products developed from this raw material.

Perhaps some of this effort could be focused on more environmentally sound practices, such as through government, industry and environment partnerships to: seek substitutes such as alternative materials, for instance ceramics or fibreglass; fuel-switch to renewable sources, such as biomass; establish energy efficiency investments and/or pursue more recycling, increasing the quantities and types of materials recycled and improving the recycling technologies. Also, effort could be applied to increasing product lives, reducing the demand for disposable products and improving product development to increase durability.

Two other levers that are within government control include the adaptation of government procurement policy to encourage the procurement of recycled materials, and consumer taxes, whereby ecological tax reform - which was brought up yesterday - could include incentives to sound environmental choices by including fuller costs in the price of goods.

Stage two, site selection, involves obtaining and using geological and other information to choose sites that are the most appropriate for mining activity. The act of choosing the site does not have direct environmental impacts, but it's important to note that some sites are more ecologically sensitive and significant than others. The environmental impact of mining may be greater if near a river, in a wildlife birthing ground, or near a national park, for example. This is because mining exerts varying degrees of disturbance on natural ecosystems, and some natural areas are more fragile or pristine than others.

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The public investment that helps to identify the location of mineral reserves and whether they are suitable for extraction includes government spending on activities such as geological surveys and mapping. The estimated budget allocation for 1995-96 totals almost $100 million, albeit down from almost $120 million two years ago. Much of this is needed for general national needs and interests, but some is oriented directly towards mining.

While these activities are useful in identifying areas that may be most suitable for mining activity, we need to be aware of how much government effort is being applied. There must be recognition of other land uses, because mining is done in the context of these other land uses. Baseline data that provides comprehensive ecological data to complement the geological data is required.

Steps to continue improving the efficiency of such government services and support sound environmental practices could include charging further user fees for government-prepared geological data that is used by specific clients, developing a more complete picture of the ecology of the area, including wildlife and plant inventories, which aspects are most sensitive, what the impacts of exploration and mining activity might be, and whether these are acceptable to stakeholders.

On stage three, exploration and development, the types of environmental impacts that can be associated with exploration and development include, for example, the disturbance of soils and streams by removing ground cover, the impacts of road-building, including erosion and increased wildlife hunting, and impacts from setting up sources of power generation that may displace wildlife habitat.

As mineral resources are drawn down, more and more financial resources are needed to move greater amounts of material. It leaves more waste behind per unit of output.

Public investment in the exploration and development stage of mining in Canada is in the form of tax measures, grants and contributions, and spending on infrastructure.

At the federal level, three main tax measures are flow-through shares, whereby exploration and development costs that a company can't make use of to reduce taxes may be flowed through to investors in mining and oil and gas, and the estimated tax expenditure associated with this measure was $50 million in 1992; the Canadian exploration expense, or CEE, in which mine exploration and some development costs may be written off at 100% and carried forward indefinitely to write off against future mine income, and tax expenditures related to mining in 1992 were about $75 million; and the Canadian development expense, CDE, in which mine development and some operating costs are deducted at 30%, which had an estimated tax expenditure of $25 million in 1992.

The direct federal expenditures in the form of grants and contributions are made up primarily of mineral development agreements, or MDAs. Through these partnership agreements with provinces and territories, the federal government contributed over $10 million per year in recent years, although I understand these agreements are being phased out.

In terms of baseline data, it's important to gain a common understanding of the amount of tax expenditures being made through flow-through shares, CEE, and CDE to track the total direct spending on government programs on mineral exploration and development and to identify the federal spending on support infrastructures such as roads, airstrips, and energy facilities.

In order to reduce the tax advantages and incentives to activities such as mining exploration and development, which may be less eco-efficient than other alternatives, the government could consider discontinuing flow-through shares, disqualifying mine development expenses from the exploration expense deductions, reducing the rate of CEE, and disqualifying mine operation expenses from the development expense deduction.

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Fiscal disincentives to sound environmental practices could also be promoted by replacing the MDA efforts with work on improving exploration and development techniques to minimize the disturbance of natural areas, including lakes, rivers, wildlife, and vegetation.

Unnecessary damage to the environment could be avoided by refraining from federal involvement in a roads-to-resources approach to accessing the Yukon and Northwest Territories and subsidized power generation facilities.

Stage four is extraction, mine operations and processing. This stage can involve extensive earth moving and a disturbance of land, water and wildlife habitat. Toxic chemicals are often used in the process of separating the minerals from the surrounding matter. Pollution occurs in the form of effluent into the water and emissions into the air.

Activities are this stage are very energy intensive. Processing the material further, such as through smelting, tends to involve very heavy energy consumption and air emissions.

The public investment at the stage of extraction and mine operations is in the form of tax expenditures, potential royalties forgone and exemptions from sales, excise taxes or duties.

In terms of federal income tax expenditures, the capital cost, or CCA class 41A, allows a 100% deduction for new mines or major expansions up to the level of income for that mine.

The resource allowance is deducted in lieu of royalties. The tax expenditure associated with this is estimated to have been $114 million in 1991, and $30 million in 1992. I understand this measure is currently under internal review.

There are also a couple of income tax measures related to manufacturing and processing in general that include mining-related activities. There's the tax reduction of manufacturing and processing profits and the CCA class 43 rate.

The federal government plays a strong role in the collection of royalties from the extraction of public mineral resources in the territories. There are a number of aspects of the royalty regimes that, although they are in keeping with the provinces, could be much improved and used to set a good example.

Royalty rates are based on the level of earnings, as opposed to the quantity of the natural resource extracted. The royalty rates do not attempt to reflect the value of the resource, nor the value of the resource options forgone. Royalty holidays are offered in the NWT, whereby royalties are not charged in the first three years of operations.

The federal government also provides a GST exemption for the construction and renovation of remote worksites and duty-free imports of off-highway vehicles used in mining and logging.

In terms of baseline data, it would be informative to determine the effective tax rate of the mining industry. I understand this may be competitive with other mineral-producing countries, and it may be low relative to other industries within Canada.

Also, consider the cost to the public purse in terms of interest forgone from having taxes deferred by the mining industry due to tax measures that allow accelerated deductions. One source estimates that the combined deferred taxes of 28 of the major mining companies in Canada amounts to $3.5 billion.

The effective royalty rate per unit of resource extracted from the territories and the rates of increase in royalty rates over the past decade or so could also be of interest.

Steps to encourage more sound environmental practices in which there is less waste per unit of output and the depletion of non-renewable resources is charged as a cost of doing business include: discontinuing royalty holidays for the territories; establishing royalty rates based on the quantity a value of the resource extracted; and having royalties deducted for income tax purposes in lieu of the resource allowance.

Also, the government could consider removing the class 41A distinction, reducing the rate of deduction allowed. Or, if class 41A is maintained, then it could refrain from extending the deduction to apply to income other than that from the mine in question.

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Although this extends beyond the mining sector, the manufacturing and processing deductions for income tax purposes could be replaced or revised to reflect deductions for value-added activities that are more eco-efficient, meaning they use fewer resource inputs and produce less waste.

Money saved by reducing tax expenditures could be used in conjunction with the mining industry to further the development of extraction and operating techniques that disturb less land and water, move less material per unit of resource, use fewer chemicals and other synthetic products, make more use of closed-loop systems in which chemicals are contained and reused, and leave less waste behind.

Stage five is reclamation closure and perpetual care. Environmental impacts on mining can occur during the mine's life, as well as after it is closed. Some reclamation is done during the mine's life, but most is done around the time of closure. Some mine sites require perpetual care due to the nature of the mine waste, tailing ponds and the surrounding area. Acid mine drainage, or AMD, can continue for generations. The mining methods used, the type of area, and the extent of prevention and reclamation all affect the environmental impacts of mining during and after the mine's life.

The U.S. Bureau of Mines estimates that abandoned coal and metal mines, and associated piles of mine waste, adversely affect over 12,000 miles of rivers and streams and over 180,000 acres of lakes and reservoirs in the United States. At least a third of this is directly attributable to acid mine drainage.

The U.S. mining industry is reported to spend over a million dollars a day to treat acidic mine water. Federal estimates in Canada for cleaning up acid drainage at existing mine sites range from $2 billion to $5 billion. An additional $1 billion is estimated to be needed for non-AMD sites.

There are 13 acid-generating mines in B.C., which is where I'm from. There are potentially 6 more that are acid-generating. These are, or could potentially, disrupt the salmon fishery. The Tsolum River in B.C. used to support large populations of steelhead, trout and salmon, but due to AMD from Mount Washington, the fishery has declined by 90%. The province has spent $1.5 million to date trying to rectify the problem.

Public investment in the reclamation stage includes the allowed deduction for income tax purposes of current-year contributions to a reclamation fund. Public money is spent on contaminated-site management and clean-up and on processes geared toward the regulation, management and control of reclamation.

This spending is geared toward enhancing the reclamation effort. However, government spending in this regard does serve to subsidize activities that should be a cost of doing business. Or it represents control mechanisms to ensure that the required activity is carried out.

The spending may act as a disincentive to companies that are setting aside sufficient funds themselves to implement sound environmental practices. If the federal treasury is there to pick up the slack and absorb the risk, the public is then exposed to financial environmental and health risks.

In terms of baseline data, we need solid estimates of the cost to clean up old contaminated mine sites and a priorization of the order in which they should be attended to. We need solid estimates of the outstanding reclamation liability of existing mines at the current time. This should be updated on an ongoing basis. The government's rough estimate for B.C. ranges from $300 million to $500 million.

The amount of reclamation funds that have been set aside by industry for existing and future obligations should be known. For example, in B.C. this amounts to $120 million. Also, how much would it cost the federal government to allow companies to shelter the income in a mine reclamation fund, as in the RSP-style proposal that George Miller mentioned?

Fiscal mechanisms to enhance sound environmental practices would include: establishing an industry-government fund and funding mechanisms for cleaning up the old sites, beginning with high-priority ones; working with the territories and provinces to require companies to set aside 100% of the funds needed to cover reclamation liability today in accordance with the recommendation to that effect made by the Whitehorse Mining Initiative finance and taxation group. In concert with this, for the record, it's important to maintain the legal underpinnings of lender liability and joint and several liability to protect the public purse from further risk exposure.

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One analysis that would be very instructive is a cost-benefit analysis of the mining industry, or cases within, to assess the overall effects in terms of employment-generated versus forgone, full public investment and full environmental costs and their implications for public health and the public purse. Our conventional analyses tend to only consider near-term economic and employment benefits.

In summary, there are potentially significant environmental impacts from mining-related activities and many ways in which the federal fiscal regime contributes to such activities. In my view, priorities for action include: pulling together the baseline data and then taking action on a government industry fund for old contaminated site clean-up; federal guidance on an industry fund for future reclamation; and redirecting fiscal incentives to unsound environmental practices, such as broad-scale exploration for virgin materials, towards sound environmental practices, such as reduction, recycling and less environmentally damaging mining techniques.

I advocate the full costing of our resources and activities, including the depletion of natural capital, and transparency of public investments for informed decision-making and stakeholder participation.

Thank you for considering my remarks.

The Chairman: Thank you, Ms Campbell.

Mr. Brewer.

Mr. Keith Brewer (Director General, Economic and Financial Analysis Branch, Department of Natural Resources): Thank you, Mr. Chairman.

My name is Keith Brewer. I'm a director general in the minerals and metals sector of the Department of Natural Resources. I've been there for a number of years. Previous to that I worked for the Department of the Environment, and Fisheries. I was a consultant to the Department of the Environment earlier, and before that I was teaching economics at Queen's University.

I have tabled with you the department's sustainable development paper, which you should now have, and I've also tabled a number of charts that will guide you as I'm speaking.

I did listen to the panel early yesterday evening, and I was struck by the need to get down to specifics. This approach is followed in my presentation, and in the handout I've set the comments against a line of questions that were provided us at the outset.

[Translation]

I am pleased to be here today and I am ready to answer your questions.

[English]

Today I'm going to talk about Canada's mining industry and the fiscal and regulatory framework in which it operates. I will try to situate both the industry and this framework in the context of sustainable development objectives.

We are of course looking at a system that has evolved considerably in recent years. Much of the recent change on the regulatory side has been for the purpose of removing unsound environmental practices. There have also been changes on the fiscal side as budgets have been cut at the federal level, and specific taxation of mining at the federal level is through the corporate Income Tax Act.

The motivation for a recent change that has taken place has been explicitly related to achieving environmental and sustainable development goals, and this is the 1994 budget measure in favour of mine reclamation fund deductibility. It's been mentioned three times now since yesterday. This tax-based measure contributes to ensuring that funding is put in place early on in a mine's life so that the funds are available when needed for mine reclamation.

Many of the concerns of this committee, in particular the central issue of how to foster investment and growth in a competitive mining industry while ensuring sound environmental practices and sustainable development behaviour, are concerns of all stakeholders in the industry. Later I'm going to tell you how in fact we have made sure the stakeholders are being heard.

I'll try to give you a sense of how these stakeholders - and I'm talking about industry, labour, environmental groups, the aboriginal groups, mining communities and governments - are attempting to reach consensus on the concerns and what concrete steps are being taken to address them at the federal level.

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If you go to chart 1, there is an outline of the fiscal regime for mining. The word ``fiscal'' - and it was used in your questions to us - implies two issues. One is taxes on the mining industry and the other is government expenditures or taxation expenditures, and both in relation to their impact on the environment.

Chart 2 gives you a comprehensive view of the evolution of changes in the federal tax system, as they apply to the minerals and metals industry, following the two tax reforms of 1972 and 1987. In general changes have been in the direction of removing tax-based incentives to achieve the objective of business decisions being based more on commercial terms.

Notably, the tax reform of 1987 has phased out earned depletion and the mineral exploration depletion allowance, which was called MEDA. We did have the Canadian exploration incentive program, which was introduced in 1989, but that too was phased out in 1991.

As an example, chart 2 shows that CEE, the Canadian exploration expense, remains in effect. This provision amounts to giving a 100% write-off treatment to business exploration expenditures.

The so-called tax expenditure is calculated as the difference between claiming that immediate deduction and some benchmark based on accounting income. Should this difference between the benchmark and the amounts now allowed be considered a subsidy?

In answer to that, there are two points here in relation to CEE. First, the 100% write-off of exploration is a pragmatic way of recognizing the high risk associated with exploration and the fact that this type of expenditure leaves the taxpayer with worthless assets if the project fails. Although other industrial sectors also experience similar risks, mining is different in having a very substantial proportion of its capital cost, maybe as high as 50%, spent on site preparation before production can start and before income can be earned.

In fact, we've calculated that only about 1 in 800 exploration holes for mining bears fruit. The usual financial accounting treatment by a company would be a 100% write-off for those 799 other holes, which is in fact the same treatment for tax purposes.

On the other hand, there are fiscal measures in place in the Income Tax Act to protect the environment.

I don't want to mention the mine reclamation contributions a fourth time, but that was decided by the Minister of Finance recently, in the February 1994 budget.

Special tax depreciation rules for pollution control equipment exist. While mine reclamation of course is a very important environmental consideration, environmental protection during mine operation is also crucial. For that reason the Income Tax Act contains special depreciation rules to facilitate the acquisition of pollution control equipment.

The Income Tax Act currently provides accelerated capital cost allowance rates for new equipment acquired by a taxpayer to reduce water and air pollution, classes 24 and 27, and certain energy conservation equipment, class 34. Costs of purchasing this equipment are deductible at rates of 25%, 50% and 25% respectively over three taxation years.

It should be noted, however, that application of class 24 or 27 is restricted to cases where the facility has been operated continuously by the taxpayer since before 1974. This special incentive was introduced to assist established industrial operations in their adaptation to more stringent environmental standards. It was a special measure in the tax system to help achieve a perhaps unexpected environmental goal that was not required of a company when the company was making its investment.

Rules pertaining to classes 24 and 27 were amended by the February 21, 1994 budget to restrict their application to equipment acquired before 1999. The rationale for this change is that operators of old plants have benefited from the accelerated depreciation incentive for 25 years, a period to allow the necessary process changes to be made.

Before we leave chart 2, I want to bring to your attention the MDAs, the mineral development agreements, and my own department's science efforts through our department's CANMET, the Geological Survey of Canada and the geomatics sectors. With other federal departments and the provinces, a lot of effort is being directed at improving the environment.

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If you go to chart 3, you will see that NRCan has carried out a lot of studies and is involved in many activities that have the purpose of integrating economic growth and job creation through mining and proper environmental protection. I can't mention all the details in the time I have here, but they're certainly available and I can provide those to the committee later.

I point out that we do not accept the general hypothesis that our attention to the mining industry through the tax system and through the direct expenditures we have contributes to unnecessary pollution and unsustainable practices. This is because there should be in place measures at the federal and provincial levels to protect the environment at all stages, from exploration to mine closure, irrespective of the tax regime in place. Rather, we want to achieve the proper integration and balance where the benefits to mining and the environment can be enjoyed to the utmost. Obviously, instances where this is not so have to be identified and fixed.

Turning to the words ``baseline study'', it's difficult to define what is meant by a single baseline study. It would be massive. I am convinced that we should not just collect data at random. Instead, efforts should be directed at specific instances where a better interaction between economy and environment can bear fruit. To get down to doing something useful, this means being site specific or issue specific. It's only then that a proper decision on trade-offs stands a chance of being made in a correct fashion, again based on the specifics of the individual case or even an individual hypothesis that's going to be investigated.

At the federal level, a number of departments - NRCan, the Department of the Environment, Fisheries and Oceans, etc. - and their ministers are now heavily involved in discussions to get the right economy-environment compromise.

For our part, at the Department of Natural Resources we've spearheaded a number of multilateral efforts. I'll refer to the intergovernmental working group studies on investment climate, which got under way four years ago. Again, all these are available. I would include them under the rubric of baseline studies available so that people don't start from scratch all the time. We exposed then many of the environmental aspects.

One of the consequences of this industry government work through the intergovernmental group, which included provinces, was the Whitehorse Mining Initiative, which brought many stakeholders into it. At the federal level an initiative called Building a More Innovative Economy has a thrust including mining. We made sure to have mining involved in that initiative. We are trying to remove inefficiencies in regulations through that. The latest initiative to come out of my department is this sustainable development paper, which is a number of weeks old now.

The point here is that all provinces, industry, and stakeholders are involved in trying to get the right balance. Everybody has their own studies and expertise. Don't reinvent a single baseline study. For our part we are in favour of continued study on a central basis, which we are integrating into our own sustainable development framework.

I'll go on to chart four. In terms of protecting the environment, how urgent is the need for federal fiscal reform in mining? On fiscal versus regulatory approaches, again, for the fifth time, deductibility for payments into provincially mandated funds was already mentioned. In relation to the mining industry, protection of the environment is now being achieved largely through regulatory means. In fact, we are in a situation where mining projects will not go ahead in Canada unless they can meet all the environmental requirements.

Recent environmental legislation, such as the Canadian Environmental Assessment Act, various acts that protect waterways, and revisions to the Fisheries Act, have all had the effect of requiring mine developers to internalize costs of environmental impacts with the objective of making harmful effects of mining on the environment a thing of the past. For example, fish habitat that could be endangered by mine development has to be expressly dealt with in the mine plan, and provision must be made for suitable compensation for maintenance or restoration of habitat.

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The Canadian Environmental Protection Act also has required producers of mineral and metal-based products to internalize the costs that were formerly shifted onto the environment or the public at large. It also requires mining operations to reduce emissions and worker exposure to toxic materials.

Given that environmental goals are now being directly pursued through regulation, the role of taxation in the pursuit of environmental objectives needs to be carefully examined. It has been argued that economic instruments, possibly including tax instruments, have the potential to deliver high levels of environmental performance more economically than regulation in certain cases. Of course, this issue should be examined closely, and to the extent that it's true, it would likely involve less reliance on regulation. In this regard, adjustments to taxation of mining income provide a rather blunt tool for achieving environmental objectives.

I want to briefly mention our own studies on international tax comparisons. In recent studies, we found that Canada has lost some ground in attracting mining investment as a result of an increasing burden of mining taxation. I refer you to chart 5, which is the tip of the iceberg of many studies that we have. We are talking here about profit-based taxes and royalties.

Canada, as with most other multilevel jurisdictions, is not a homogeneous tax entity, something that is sometimes overlooked. Each province and territory has a different set of tax regulations and thus different overall tax burdens.

Chart 5 presents the Canadian tax burden on mining in an international context. Even though the Canadian profit-based tax regimes may seem to provide relatively advantageous tax write-offs by international standards, the results of quantitative studies carried out by my department indicate that Canada's tax burdens for base metal projects are roughly in line with those of foreign competing jurisdictions. This happens because Canadian tax rates, which tend to be notably higher than elsewhere, are balanced by deductions like the CEE expense, which can be deducted up front by a company.

We must not forget non-profit-based taxes. In Canada, non-profit-based taxes - for this introduction I am excluding those taxes connected to environmental requirements - have remained relatively constant as a proportion of either operating costs or sales.

On the other hand, the cost of environmental compliance by companies has not remained constant. For instance, between the period 1988 and 1990, environmental compliance costs more than doubled. Of course, that reflects increasing burdens on companies to comply with such things as environmental permitting.

If we are worried about the ability of the mining industry to continue to provide employment in this country, we have to consider the overall burden of taxation on its competitiveness. Canada does have high marginal tax rates on mining, and there are plenty of alternatives in the world to investing in minerals in Canada. That's why there has been so much debate over the past five years on the country's investment climate.

I have a number of comments to finish this section. The increasing proportion of a mineral company's cost devoted to environmental compliance is an important finding. It should be reassuring to this committee. The tax rules applied have to be examined in the broader context of international competition for mineral investment.

Moving significantly away from international practices may affect the comparative viability of Canadian mineral investment and impede job creation. The current CEE treatment for pre-production exploration expenditures parallels similar measures applying in major foreign jurisdictions that compete with Canada. Most mineral-producing countries accord a 100% write-off for mining exploration expenditures, and the current international trend is to make the claiming rules of these expenditures more flexible as well as more liberal.

With respect to pre-production development expenditures, Canadian rules may appear more generous than those of Australia and Chile, but are practically comparable to rules in the United States, South America, elsewhere in South America and Peru. It must also be understood that in the case of Chile, a much more significant incentive is provided by the absence of any royalty regime.

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At chart 6 -

The Chairman: Mr. Brewer, I would ask you to accelerate it, because people want to ask questions.

Mr. Brewer: Yes, Mr. Chairman.

The concept of the level playing field brings up the question of equity in the tax system. A major concern in the tax reform of 1987 was to ensure that special incentives, special deductions, and special write-offs were dismantled. The principles of fiscal equity demand equal treatment of those in similar situations, but they often require different treatment in these different situations.

I'm sure the questions will address this, so I'll jump on to the application of this issue of the level playing field, namely, virgin mineral products and recycled metals. One issue is the impact of metal recycling on the supply-demand balance. We believe that recycling and reprocessing is important for saleability, and we're for it.

Recycling from existing stocks and other studies we've done show that we cannot rely only on recycling to supply final demand. We'll always need newly mined products. I will just quote some of the changes in the amount of final demand satisfied by recycling.

In 1977 lead was 33%, but in 1994 51% of the final demand for lead was satisfied by recycled products. In the case of aluminum, it was 20% in 1970 and 33% in 1994. In the case of copper, it was 30% in 1970 and 40% in 1994. This shows that recycling is increasing naturally with the system in place.

There are immediate differences between the recycling and resource extraction industries, particularly in terms of risk, and the tax system reflects these differences. For instance, there's nothing in the recycling industry that parallels resource exploration, so no part of investment in recycling receives a tax treatment similar to exploration spending. Similarly, unlike typical investments in the recycling industries, resource development costs such as the removal of overburden prior to mining often do not result in the creation of a marketable asset.

The major differences between mining and recycling, rather than any attempt to create a bias between these two activities - tilt the playing field - is what accounts for the dissimilarities in their tax treatment. Recycling is closer to manufacturing from a taxation viewpoint, since it purchases materials from a relatively stable market and transforms them in various ways. There is no requirement for investment in risky exploration in order to carry out this activity.

This is my last paragraph on this subject. The experience of the last few years has shown that obstacles to recycling are more likely to arise from poor regulatory approaches than from possible bias in the tax system. For example, pressures to introduce a regulatory regime for metal scrap similar to that used in relation to hazardous wastes works against recycling efforts and threatens to divert valuable recyclables into landfill or other disposal facilities.

This is the last chart. In relation to the question, my answer would be that we cannot prejudge what ministers may decide about future policy, but I can refer you to a list of actions and initiatives endorsed by our minister and already under way in the department. These initiatives are essentially not tax-based, but they have the objective of attaining sustainable development in mining.

There is a range of outstanding environmental issues associated with mining. These include acid mine drainage, abandoned mines, mine reclamation and harmful emissions. There are also a host of potential impacts on the environment of new mine development, fish habitat, wildlife, waterways, etc.

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I'll take 60 seconds more, Mr. Chairman. We have lists of departmental projects to achieve sustainable development. They can be provided in detail to the committee.

There was mention of the mine environmental neutral drainage program. That's only one. There are many: aquatic effects; technology evaluation programs; workshops on mine reclamation, metals in the environment, toxic substances, and heavy metals; mineral energy resource assessments, Basel Convention, a proposed ban on waste destined for recycling. I won't go on. I will say they're available, and in the interests of time, Mr. Chairman, I'll finish there.

The Chairman: Thank you very much, Mr. Brewer.

We only have time for one round of questions, possibly a quick one, starting with Mr. Forseth.

Mr. Forseth (New Westminster - Burnaby): Mr. Miller, you talked about this environmental pension plan scheme. Could you just take a minute or two to flesh out that idea and to explain in clear, simple terms, to us and to those who may be watching on television, just really what this concept is about?

Mr. Miller: Thank you, Mr. Forseth.

The proposal arises from the changes in the mining acts of several provinces. The provinces have now, quite properly in our view, required pre-planning of mine reclamation from the day before the mine is built so that a reclamation plan is in place and the mine will be designed with reclamation in mind. We fully support that initiative. Certain provinces have also required financial assurance to be placed so that the reclamation plan will actually be carried out at the end of the mine life, and we also support that provision.

There are various ways of providing financial assurance. If the company is profitable enough, it can set aside money on the balance sheet and there will be assurance that the money will be available at the time of reclamation. On the other hand, in certain cases it may be required that cash is provided, that cash is put into some kind of trust find so that there is no question of any kind that it will be available. In the particular case where a trust fund is required, our view is that the moneys deposited in the trust fund should be tax deductible as a business expense, and the Minister of Finance did make that provision in the 1994 budget.

Our second position is that the earnings in the trust fund should be sheltered from taxation so that the fund will grow as the liability grows and it will grow faster than it would if it were taxable. Unfortunately, the Minister of Finance and the officials have said they're not prepared to go the second step, not yet anyway, in the fiscal situation the country finds itself in.

But if both of those provisions were in place, it would be equivalent to a company pension plan or an RRSP, where the deposit is a business expense and the earnings in the fund are not taxed.

Mr. Forseth: Did you have any submissions to make? I noticed a bill that was just introduced last Friday in Parliament; it had to do with the Bankruptcy Act. It relates to perhaps a mine that goes bankrupt and the environmental issues that are left over and who's first after whatever assets are left. There are some issues there related to mining.

Mr. Miller: I believe that with the provisions that are coming into place now in Canada, the financial assurance will be there. The case of bankruptcy will not affect the ability to do reclamation.

Mr. Forseth: Does any other presenter have additional comments on the topic I've brought up?

Mr. Brewer: I was just going to say that this provision in the February 1994 budget really is designed to make sure that well before the end of a mine life or a time when a mine might go bankrupt, there is a fund available which is in fact with a trustee approved by the province. That's the whole point of making sure that even if a company wanted to make restitution and reclamation, it can't do it if it has no funding. That's why it's very important that the provinces have moved in this area, of which one provision is to make available this institution of a fund if there are no other assets they can call on.

Mr. Forseth: Thank you, Mr. Chairman.

The Chairman: Thank you, Mr. Forseth.

Mr. Lincoln, please.

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Mr. Lincoln (Lachine - Lac-Saint-Louis): I'd like to put a question to both Mr. Miller and Ms Campbell. Regarding recycling, for instance, Mr. Miller made the point that with regard to recycling we have the Japanese study that was academic in scope and perhaps didn't reflect the real issue.

I want to know from you and Ms Campbell whether you would agree that there should be a broad study, a deeply researched study on the whole question of recycling in relation to mining that would touch on all the components going into energy savings, jobs, etc., so that somehow we all know what the balance should be in relation to economic policy between virgin exploration and recycling into the long-term future.

Mr. Miller: Thank you, Mr. Lincoln. I believe that such a study might be worth while. It should be carried out on a sectoral basis and on a commodity basis. In other words, the system for recycling steel is not very similar perhaps to the system for recycling copper.

The markets for all the different metals are global. They go into different end-uses and I would recommend that we look at the recycling system metal by metal.

Ms Campbell: I would echo what George Miller just said and also add that the balance of recycled versus virgin materials is never going to be static; we're never going to know the right answer. I'm glad the industry has progressed in terms of increasing the relative proportion of recycled to virgin materials, and I'd say let's keep going, let's keep pushing the edge of that envelope and give appropriate fiscal signals to encourage that sort of behaviour.

Mr. Lincoln: Mr. Miller and Ms Campbell, and also Mr. Brewer, there seems to be a dichotomy between you in regard to the tax treatment of mining. It seemed to me as I listened to Ms Campbell - carefully enough - that she advocated flow-through shares be deleted in the future, that the CDE be merged into the CEE and so forth. Mr. Brewer and you seemed to imply that the tax system was fine as it was, there was no need to change it.

I wonder whether you could tell us, both of you, whether you feel, Mr. Miller, that there's no validity to Ms Campbell's idea that this thing be examined in depth, that flow-through shares should be stopped and, for example, the CDE merged into the CEE?

Mr. Miller: Thank you, Mr. Lincoln. I think I'd like to first put a little frame around the question from my perspective, if I may.

Ms Campbell has taken a very broad-brush approach and has identified a number of specific tax measures that apply to the mining industry. Whether they are incentives or whether they are subsidies I think is another question, but I believe that if you take in the totality of her recommendations regarding the tax system, you would be saying that the tax burden on mining would be so great that the industry could not exist in Canada or it could not exist at anything like the scale that it is today.

As you can expect, that would be a relatively unacceptable outcome to the mining industry.

Ms Campbell's basis for recommending that again is rather broad-brush. It seems that she's identified a number of so-called unsustainable practices, widespread mineral exploration being one of them. We would not agree that mineral exploration is an unsustainable activity.

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On production, Mrs. Campbell alleged that there is extensive damage to wildlife and heavy emissions from smelting and that anything that encourages either mineral production or smelting will be unsustainable.

We are convinced that, and we are rigorously working towards a situation in which, the impacts of mining and processing will truly be limited, local and temporary. There will be impacts. We have to accept that any large-scale industrial activity has impacts. But we are gradually and progressively stopping the practices and modifying the practices that lead to major impacts, acid drainage being one of them. I could go on at length about the research programs that are simply going to eliminate that as a problem.

So my overall response is that a widespread change of the tax system, unless something is put in place to provide an equal economic incentive for mining, would simply destroy the industry, and we don't accept that would be good for Canada.

Ms Campbell: It's important that we understand what investment the public purse is making in the mining industry. If that investment were altered, what would be the effect on the mining industry? We also need to consider the effects of our investment on the environment. The depletion of a non-renewable resource is, one day, unsustainable by definition.

Rather than having tax measures or any fiscal measures that just encourage activity without certain requirements for sound environmental practices or that aren't as targeted as they could be, we could adjust our fiscal measures to encourage more sound environmental practices. So why don't we gear them that way?

Also, my fellow panel members have mentioned the need for regulation, and I strongly echo that. In the absence of strong regulations or enforcement of those regulations, the activities that are unsound environmental practices will tend to increase. So in combination with fiscal measures, we really need the strong regulatory regime to manage mining activity.

The Chairman: Thank you.

Mr. Adams, please.

Mr. Adams (Peterborough): Thank you, Mr. Chair.

I want to thank the panel for very interesting presentations and some very useful documents.

By the way, Dr. Miller, it's a pleasure to meet you again.

I have what I hope is a very short, general question and then I have a more specific question for Ms Campbell if there is time.

Although in this document, Sustainable Development and Minerals and Metals, there's a reference to the Task Force on Economic Instruments and Disincentives to Sound Environmental Practices, and the reference is to recycled material, my sense is that the mining sector was not involved in this task force, nor, by the way, was it involved in the Canadian International Institute for Sustainable Development study of these matters.

I just wondered if either Dr. Brewer or Dr. Miller would care to comment on that.

It seems to me that your example of the fact that the tax is higher on recycled metals - that's what I heard - is a really good example of the sorts of things we're looking at.

The Chairman: Would you please have short replies? We are running out of time.

Mr. Miller: I'm going to ask Mr. Keyes to give a short reply, Mr. Chairman.

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Mr. Robert Keyes (Vice-President, Economic Affairs, Mining Association of Canada): Mr. Adams, I was involved in an organizing meeting for that task force, and then things seemed to fall between the cracks, and I saw the report. So I was not involved and the association was not involved in the deliberations of the task force that came out with this.

Mr. Brewer: I personally was not involved either, but essentially it was between Finance and DOE.

Mr. Adams: My other question is to Ms Campbell.

It has to do with your comment on the Geological Survey's exploration budget, which has been cut from $120 million to $100 million, as you pointed out. But then you went on to say you think during those surveys they could pick up more ecological data and so on.

I think all the geological reports already do that. There are topographical surveys and other ways of collecting those informations. I wonder how you think that objective of making more use of that exploratory budget could be achieved through the tax system.

Ms Campbell: Actually, I didn't contemplate that the ecological data could be gathered during the geological studies, but that some funds could be transferred from geological to ecological. I was talking about wildlife inventories, etc., not just topographical information. Ecological data and budgets for that are quite lacking.

Are you wondering how to pursue the ecological data by using tax measures?

Mr. Adams: Giving us subject matter, as I understand it, is the task of the fiscal system. How would we do that? What sorts of devices would we use, then, to encourage that? Or is it simply a matter of taking money from one pocket and putting it into another?

Ms Campbell: It's not very imaginative, but that's what I had contemplated. I would have to think about tax measures to generate the money for ecological data-gathering.

Mr. Adams: Okay.

Thank you very much, Mr. Chair.

The Chairman: Thank you.

Next is Mr. Finlay.

Mr. Finlay (Oxford): Thank you, Mr. Chairman.

Ms Campbell, you spoke of valuing natural capital in whole-cost accounting. How do we begin to calculate natural capital?

Ms Campbell: It's a difficult subject and one that I'm applying my career to, and I'm just at the beginning of it.

Natural capital would mean the natural resources we have in our country - the trees, the clean drinking water, etc. Our national accounts - our gross national product, etc. - go up when we consume more. Business incomes go up at times when resources that were public are processed to a value-added stage and income is earned on the sale of those, but the initial value or cost of those natural assets is often taken as either nothing or quite a low amount.

How do we value it? I'm glad you asked that question. I'll have to think of a way to answer it briefly.

Various economic techniques are proposed for looking at the value. I think it's actually too difficult to describe at this point. I'll talk to you afterwards.

The Chairman: Are you referring to Mr. Repetto's studies?

Ms Campbell: That type of thing, yes.

Mr. Keyes: I have a brief reply on that point, Mr. Finlay.

As Barbara says, it's a very difficult issue, and it's one that economists have been scratching their heads at. They've been trying to come up with various ways of tackling the problem.

You can count and see the trees, you can see soils and you can net fish, but we don't know where the minerals are. If we knew where the minerals were, we wouldn't have to worry about exploration. So trying to value what our natural capital is in terms of mineral endowment is exceedingly difficult, and there has not yet been developed by economists a good economic methodology for tackling this problem to come up with an answer that really means something.

It's tough, because that's why we do exploration: we don't know where the mineral resources are. All we can point to are indications, geological and resource potential, but it's a long way to translate that into mineral deposits. And as science and technology and understanding changes, the estimation of our natural capital will change. For example, nobody ever thought of diamonds in this country, but we now have diamond resources. That has added substantially to our natural capital, but five or ten years ago nobody would have put that into the equation. So it's a very complex subject.

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The Chairman: Thank you.

Mr. Wappel (Scarborough West): I have a brief question for Mrs. Campbell, and a question to the panel in general.

Mrs. Campbell, I need clarification on something you said, that depletion of a non-renewable resource is unsustainable by definition. That's a statement of the obvious in its strictest definition, but I hope you're not suggesting that any industry that involves the depletion of a non-renewable resource shouldn't be done because it's unsustainable?

Ms Campbell: Not that it shouldn't be done because it's unsustainable, just that we must recognize that although it's almost impossible to conceptualize, one day there will be a finite end to something that won't regenerate.

Mr. Wappel: That's obvious, but it's the case with everything depending on how long we go, including air and everything else ultimately. If there's no more gold, then I guess we change our gold standard. If there are no more diamonds, then we exchange rings of other kinds. Surely you're not suggesting that we go back to pre-civilization with respect to what we do with resources that don't renew themselves, or don't renew themselves within a reasonable lifetime of several generations - oil, for example.

Ms Campbell: I wasn't suggesting that we go back to pre-civilization days.

Mr. Wappel: In other words, you agree that we can use non-renewable resources and still have an appreciation for the environment.

Ms Campbell: Yes.

Mr. Wappel: All right, thank you.

Ms Campbell: I might add that renewable resources need to be managed in a sustainable fashion as well, as they can be improperly managed. In the case of our forests, what is a regenerating resource can become pretty much unsustainable.

Mr. Wappel: I agree with you, yes.

To the panel in general, I enjoyed the presentations. As I understood them, they can best be distilled by what Mr. Brewer said - Mr. Brewer, correct me if I didn't get your point - which was that the mining industry's approach to the environment is primarily accomplished by regulatory means.

Number one, there are tax incentives for environmentally friendly things and things of that nature, for environmentally friendly machinery that the mining industry might want to buy and use. There are subsidies that help to promote the environment and promote environmentally sound practices. All of this is fantastic, but this forum is on fiscal disincentives, not incentives.

Mr. Brewer touched on it briefly, on the overall tax system and how difficult it is in comparison to other countries, and how difficult it is for the mining industry to continue in business in Canada because of the overall tax system. Can anybody on the panel give me some concrete examples not of incentives or incentive subsidies, but of fiscal disincentives, other than saying the tax system in general?

Mr. Miller: I cannot think of any fiscal disincentives to sustainable behaviour, but I would like to supplement your view of how we're reaching sustainability in the mining industry. Regulation is an important part of it, but voluntary activity is an important part of it, and so is partnering activity. Most of the fundamental progress we're making toward sustainability, in a scientific sense, is being done as a result of partnerships between the industry and both levels of government and other stakeholders, including the environmental movement and research programs that are getting at the problems we have to deal with.

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Mr. Brewer: I have trouble responding to a question like that, for the reasons that I think you picked up in my remarks. That's why I wanted to address my remarks to the way we originally received the questions from the committee. I have great difficulty following that concept, and I'm willing to debate it if someone can say what is a fiscal disincentive.

Mr. Wappel: In the mining industry, which is what you're talking about.

Mr. Brewer: Yes.

Mr. Wappel: Thank you.

Mr. Brewer: There is also the question of criteria. Maybe we don't have time to go into it, but what are your criteria and what's your framework? If I was still in the academic milieu, I probably would be talking about general equilibrium and full employment models, where you can talk about a concept of tax expenditure or distortion. Once you get in the real world, those concepts, while useful as a training device and to get you thinking, discipline....

When you have to make decisions and a country is at a certain point in its economic history, the relevant question becomes this: give me a hypothesis for a change that would improve society. In this case we're talking about sustainable development, or getting a better balance between the environment and the economy. That's the framework we're now in.

You have to be site specific. That's where you can apply this concept I've just advanced.

The Chairman: Thank you, Mr. Wappel. Perhaps the witnesses are not aware that you specialize in troubling questions.

Mr. Wappel: They will be.

Mr. Lincoln: Mr. Miller, we've been talking about your association and the large exploration and mining companies that have the resources to clean up and explore properly. What about the little ones that go bankrupt, that have left a legacy, especially in the north, of little exploration sites? Many of them don't have the resources to pick up and so on.

Related to this, what is your view on the large foreign companies? I'm talking about diamond exploration, because your colleague mentioned diamonds being a new source of wealth in Canada. This is a new source of worry for a lot of people in the north. We are talking about BHP and DeBeers coming in to the western Arctic, with an almost free license to do this on a massive scale.

Without the study being carried out by DIAND, maybe we would just have a site assessment on only one site. This thing covers a massive piece of land. So what are your association's views on, first, protection against the small people who explore without the resources to protect the environment; and second, the large mega-companies that come in from outside without any restrictions and explore on a giant scale, especially in fragile areas like the Arctic?

Mr. Miller: Mr. Lincoln, I think there are differences between large and small companies, and resources is certainly one of them. Our association tends to represent the larger companies. We believe that it is important to clean up exploration sites, just as it is important to reclaim a mining site. Good practice guidelines for mineral exploration have been prepared by the association that represents the smaller companies - the Prospectors and Developers Association. We believe those are being followed by today's small companies. I hope that's true.

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There are also provisions in the land-use regulations of the Northwest Territories, for example, that require site clean-ups. Bonds are being taken to ensure this takes place today. I think we are seeing the legacy of older times when some of these provisions and guidelines were not in place.

With respect to exploration by foreign companies, Canada doesn't make a distinction between the sources of economic activity in minerals. The actual diamond find of the Northwest Territories, however, was made by a prospector. The companies that came later and staked out a large amount of territories were foreign and Canadian.

We have the exploration branch of BHP as a member. My understanding is that they are going to great lengths to reach accommodations with the aboriginal communities. They are supporting the regional study you mentioned.

In fact, I supported that regional study myself in non-monetary terms before it was undertaken. We do feel it's important to do regional studies so that the overall impact can be assessed and sensible land use planning can be carried out in advance of the assessment of individual projects.

Our association does not make a distinction about the origin of our member companies or the original of capital. We believe in the free flow of capital worldwide. Our companies explore in Canada and other countries. In fact, they have made a commitment under our environmental policy to carry out exploration and operational and development activities with the same sensitivity in foreign countries that they would show in Canada.

The Chairman: Thank you. Briefly, from the chair, I have perhaps two questions.

One goes back to what some of you said about the question of virgin materials versus recycled materials and the taxation thereof. We are told that Professor Mintz of the University of Toronto recently produced a study that, among other things, concluded with the following remark:

...there is a potential bias in the tax system in favour of the production of virgin materials relative to recycled materials.

You have already commented on it. I just need to know whether you agree with this comment and to what extent you see this bias in the present tax system.

Perhaps, Mr. Brewer, you would like to tackle that.

Mr. Brewer: Yes, I did read that study at one stage. I just refreshed my memory yesterday. One thing that strikes me - I'm going to be very quick on this - is that it was mentioned that this was not a study of actual companies and the taxes they pay; this was a model.

If I got it right, the prime result by Jack Mintz was that in one case the unit cost of production for recycled material was increased by 24.7% by the taxes that applied. In the case of virgin materials, the unit cost of production was increased by 22.9%, or something like that. Anyway, there were a couple of percentage points of difference, as a result.

What strikes me is that in the realm of scientific experiment, which is what this was, that is hardly anything. Therefore, I'm not surprised that when you quoted Jack Mintz's first word, it was ``potential'', Mr. Chairman.

It's a good thing to calculate this. I'm not convinced that it's a result that should get people to come down one side of the issue or another.

The Chairman: Thank you. Any other comments?

Mr. Miller.

Mr. Miller: Mr. Chairman, we have similar questions about the methodology. We don't have any evidence one way or the other, but we do feel that a modelling study needs to be supplemented by some microeconomic work before we can make a serious conclusion.

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The Chairman: My second point is addressed mainly to Mr. Brewer. Don't you think,Mr. Brewer, when you include in your presentation a tax burden chart like this, as you have distributed today, that you somehow weaken the effectiveness of your presentation? You make a reference to Chile, Mexico, Peru and Venezuela. You're not implying, I'm sure, that we would want to weaken our standard of living and compare ours to those countries and their taxation system.

In your own chart, the moment you introduce Australia, which has a comparable living standard, the tax burden is greater there than in Canada. So inevitably you create a problem in the minds of your audience. I wonder whether in future you wouldn't want to remove this chart for effectiveness and the sake of your presentation.

Mr. Brewer: Mr. Chairman, that was put in for a particular reason, to emphasize the point that the actual taxation on mining companies is through the Income Tax Act.

The issue of what the burden is in Canada compared to these other countries has nothing to do with living standards directly. What it's to do with is the issue of mining companies that now provide employment in Canada by exporting Canadian minerals and are subjected to these tax systems. They are telling us and have been telling us for at least five years in a very direct way that the tax system in Canada has been a disincentive to investment in minerals in Canada.

The question simply is that they have the ability to go wherever they can get the best returns. There certainly has been a big change in the ground rules, if you like.

The Chairman: That's fine. The same applies to the textile industry, but we certainly don't introduce the notion that we should go back to child labour as they have it in certain Asian countries that are competitive with us. The issue is much more complex than just a tax burden, the way you see it, and sharing the tax burden. The total population also benefits, and the standard of living, of course, is reflected in it.

You can't just take this in isolation and ignore the benefits that come from a certain burden on the population at large, if you see what I mean. It is not that simple; it's not a one-dimensional question.

Mr. Brewer: You're absolutely right, Mr. Chairman; it's not one-dimensional. This only makes one point, and that's to do with one factor that influences where mining companies go in the world.

The Chairman: Yes. The point I'm trying to draw to your attention is that you're weakening rather than strengthening your case because inevitably your audience would start comparing standards of living.

Mr. Brewer: Maybe you'll have to talk to me more on that so I can start to follow that. I certainly didn't go into standard of living, but obviously standard of living is at the heart. Standard of living in a physical sense and in enjoyment of the environment is obviously central to this committee. So you're right in the fact that it's much more complex.

The Chairman: The health care is also central to the interests of those who are engaged in the mining industry.

Mr. Brewer: You're absolute right.

The Chairman: Thank you very much.

Since we have a quorum here right now, I will put forward a little item of business that is required following the decision we made on the Arctic subcommittee. We have decided to form it.

As a result of that decision, I would entertain a motion to the effect that further to the motion striking a subcommittee on the Arctic, adopted on November 22, the chair of such subcommittee be Clifford Lincoln, with Peter Adams, Madame Kraft Sloan, Mr. Forseth or a substitute colleague of his, and Madame Guay or a substitute colleague of hers, so the subcommittee can start laying the foundations for its work under the chairmanship of Mr. Lincoln.

Could I have a motion to that effect?

Mr. Wappel: I so move.

The Chairman: Moved by Mr. Wappel. Are there any questions?

Motion agreed to

The Chairman: Thank you.