April 1, 2018

Decarbonizing Heavy Industry: The Low-Carbon Transition of Canada’s Emission-Intensive and Trade-Exposed Industries

The Standing Senate Committee on Energy, the Environment and Natural Resources is studying what it will cost ordinary Canadians and businesses to meet Canada’s greenhouse gas (GHG) emission reduction targets. It is examining the effects Canada’s GHG reduction targets will have on five sectors of the Canadian economy: electricity, transportation, oil and gas, buildings and emission-intensive trade-exposed industries that are mostly heavy industries that compete in international markets.

Emission-intensive trade-exposed industries (or heavy industries) are the subject of the committee’s current study of the low-carbon transition and it represents the committee’s third interim report. The committee released its first interim report on the electricity sector in March 2017 and its second interim report on transportation in June 2017.

In a final report, the committee will make recommendations to the federal government that will help achieve Canada’s emission reduction commitments in a manner that is sustainable, affordable, efficient, equitable and achievable.

Canada’s manufacturers of refined petroleum products, iron and steel, cement, aluminium, chemicals, fertilizer and pulp and paper, together with the country’s mining sector, employ over one million Canadians and contribute significantly to Canada’s economy by transforming natural resources into the basic building blocks into which most goods are made. As the country’s heavy industries, they require large amounts of energy to operate and are large emitters of carbon emissions. Since industries compete with international firms at home and abroad, they are highly vulnerable to carbon pricing programs and other emission reduction requirements that place them at a competitive disadvantage among foreign competitors that are not bound by similar emission restrictions.

Overall, the carbon footprint of Canada’s heavy industries is among the smallest in the world due to the country’s clean electricity generation and abundant supply of natural gas as a feedstock for industrial processes. This stands in contrast to that of Canada’s major foreign competitors which rely on coal for electricity and industrial feedstock.

Carbon pricing is a central component of Canada’s plan to achieve its Paris Agreement emission reduction commitments of 30% below 2005 levels by 2030. It marks new fiscal territory for many Canadian governments. Witnesses representing industries within Canada’s emission-intensive and trade-exposed sector expressed concern over the ability to compete with foreign firms who operate with no or lower emission requirements. The federal government and many provincial governments have introduced or announced measures to limit the potential carbon pricing impact on emission-intensive and trade-exposed firms while incentivizing them to reduce emissions. Ideally, measures to limit the impact should be temporary until carbon pricing or its equivalent is more uniformly applied across trading partners The committee also explored the federal government’s proposed Clean Fuel Standard which would impose carbon intensity requirements on fossil fuels. Some industry representatives believed that industrial use of these fuels should be exempt from the standard since it marks an incremental cost to carbon pricing programs.

The committee considers whether the federal government should make the carbon intensity of materials a condition for purchasing decisions and for federally-funded infrastructure projects. It seems counterproductive to award government contracts that use products produced by foreign producers that have an unfair cost advantage because of weaker emission reduction requirements.

Finally, the committee underscores the importance of research, innovation and explores options for deep decarbonization within the industrial sector.