PODCAST: How the CFS could hurt Canada’s economic recovery

Economist Miguel Ouellette of the Montreal Economic Institute discusses how the proposed Clean Fuel Standard could be detrimental to Canada’s recovery with uncertain environmental outcomes.

Update: Since this podcast was recorded, the federal government has announced the Clean Fuel Standard (CFS) will no longer apply to gaseous and solid fuel streams, addressing one of the key concerns over the CFS. Pending the release of details on the liquids stream of the CFS, concerns regarding cost and inflexibility of the proposed regulation remain.

Miguel Ouellette is an economist and director of operations with the independent think tank Montreal Economic Institute (MEI). 

Energy Examined host Tracy Larsson speaks with Ouellette about a recent MEI report on the Clean Fuel Standard, proposed federal regulation to lower greenhouse gas emissions through the use of lower-carbon fuels. Ouellette outlines concerns over the legislation’s inflexible approach which would harm Canada’s economic recovery while producing uncertain environmental benefits.

Full transcript of podcast:

Tracy: Hi, everyone. This is the Energy Examined podcast. I’m Tracy Larsson. This episode we’re talking about a new federal energy policy in the works called the Clean Fuel Standard, or CFS. Here to shed some light is Miguel Ouellette. He’s an economist and director of operations with the Montreal Economic Institute. Hi Miguel. Thanks for joining the podcast.

Miguel: Hi Tracy. Thanks for having me on the podcast.

Tracy: Can you start by giving an overview of what the clean fuel standard is?

Miguel: Sure. So, this is a new policy that aims to reduce annual greenhouse gas, so GHG emissions from fuels by 30 megatonnes by the year 2030. So according to the government’s website, the plan is complementary to other climate policies, including the carbon tax, which is quite surprising. It will impose additional requirements notably for propane and natural gas, making Canada the only country in the world to do so. And a study of the Canadian CFS two months ago from LFX Associates, if I remember well, reports that permits for the CFS will be offered at a target price of $200 per tonne of carbon dioxide emissions. So, it’s four times higher than the carbon tax and also higher than what the research suggests is the likely social cost of carbon. So bottom line, I would say that this is essentially a new tax imposed on job creators as they’re struggling to recover from the effects of the pandemic.

Tracy: Well, you recently prepared a report for the Montreal Economic Institute looking at the CFS and what it means for Canadians and for Canadian industries. So, tell us a bit about what you found.

Miguel: Sure. So, I arrived at three main conclusions. First, the CFS is inflexible. It will duplicate the current regulation. And third, it might not lead to the economical desired effects. So, first off, why do I say it’s inflexible? Well, in times of a pandemic, what our businesses really need is a more flexible regulatory framework, not another tax that will put at risk Canadian jobs and businesses. Also, as I mentioned, Canada will be the only country in the world to impose such requirements on propane and natural gas. So, as we know, Canada is responsible for only 1.6 per cent of the world’s GHG emissions. So why do we have to be so inflexible? That’s one of my questions right now. And as I wrote in the paper, it is often a good thing to lead the parade. But parading all by oneself is a whole different story. So, this is the first point and second, the duplication problem. So as the federal government said, the CFS will be complementary to other climate policies, such as the carbon tax subsidies to so-called green energies, quotas on production and other mechanisms. But why make it so complicated? We should really have one tax or carbon pricing mechanism and forget the other costly regulations such as the CFS. By duplicating, we really harm our economy and the environmental benefits are not even certain. So, if we really think a carbon tax is the solution to our environmental problems, we shouldn’t need extra regulations and complicated frameworks. And third, I talked in the paper about the unintended consequences. In fact, while the main goal of the CFS is to reduce GHG emissions in Canada, I think we must not forget the main objective is, which is, to fight global warming. So, if we keep introducing such regulations that make it harder for businesses in Canada to operate, they will just move somewhere else where it’s less costly. It’s just rational. And that’s what we should expect from companies. Now, do we really want our businesses to operate in India or Bangladesh where they almost pollute all they want? Or do we want to be more logical and pragmatic in our regulatory framework here in Canada so we impose a carbon tax without making them want to leave? I think we should really keep that in mind. And that’s the bottom line, I would say, of my paper.

Tracy: OK, so you identify manufacturing as one of the sectors that will be particularly impacted by CFS. What could that mean for the sector, which, as we know, it’s so important to Canada’s economy?

Miguel: Exactly. It’s a very important sector for our economy. And we calculated that 1.7 million jobs in the manufacturing sector in Canada could be affected by this new measure. Now, it doesn’t mean that we’ll lose 1.5 — 1.7 sorry — million jobs obviously, but it shows how dangerous this new tax could be for our economy. And we don’t hear it enough in the media and the television and. I think it’s a little bit absurd that it can hurt our economy, but we don’t quite hear it a lot on the TV. And also, it is not only the manufacturers that will pay the bill, it’s the consumers and the other companies and the supply chain, that will also pay the price.

Tracy: How does it get passed on down to consumers? Can you expand on that?

Miguel: Yes, sure. So, some manufacturers, for example, when they use propane or natural gas as inputs, well, if we make propane, if it costs more, then of course, the bill for the manufacturer will go up. But then in the supply chain, there are so many companies. So, the first one will pass a part of the bill to the second one, the second one to the third one and etc. until we arrive to the consumer. So even Trudeau’s government, in their report, they said that consumers in Canada will pay a huge part of the bill of the CFS. So sometimes companies, if they can afford passing the bill to consumers, they will.

Tracy: What about other sectors of the Canadian economy besides manufacturing. Can they expect to be impacted in a similar way?

Miguel: I’m quite sure, yes. We’ll have to see when the federal government releases the framework of the CFS. But since there are so many businesses and sectors that are using natural gas, propane and other fossil fuels as inputs, the CFS will touch a big part of our economy. So, in the next few days or few weeks, we know that the federal government is supposed to release the CFS. So, I can’t wait to read it and see what other sectors would be impacted. And also, of course, it will hurt the oil and gas sector in the West. And again, we might end up paying the price as consumers. So, we will have to see. And I think it’s quite deceiving that the government did not publish a cost benefit analysis of the CFS. I think they published one small research paper, but it’s not really rigorous in the sense that it doesn’t touch all that we are talking about right now. So, I think other sectors of the economy will be touched, that’s for sure.

Tracy: Right. If we’re looking at these costs going up and the cost of inputs, for example. How does it affect the ability of Canadian companies then, to compete internationally?

Miguel: Well, if it becomes so much more costly to do business here in Canada, our companies will move to other countries, just as simple as that. And as I said earlier, we should really keep that in mind. So, we know that other countries, even the U.S., some companies in the U.S. they use coal as inputs. Here in Canada, some of our businesses do, but most of them they don’t. So, if our companies decide to go do business in the U.S., let’s say, because it’s less costly and deregulated, the framework is easier to understand, then they’ll switch from, let’s say, natural gas here or propane to coal or other energies like that, and then the environmental benefits that I said were not certain, then it becomes negative. So, we should really keep that in mind when we think about the international competition of Canada.

Tracy: So, your report with the Montreal Economic Institute, it suggests that the clean fuel standard omits the fact that climate change is a global phenomenon, not a national one. Can you expand on that a bit?

Miguel: Yes. So, it goes along with what I said. I feel like in Canada we think that we can change the world when it comes to global warming. And I would love Canada to change the world on that. But if we keep in mind the reality of our world, as I said, we’re just 1.6 per cent of the world GHG emissions. So, if we keep imposing CFS, other taxes and other — even like subsidies to green energies that are costly for our companies, but also for the taxpayers — well, companies will just move. So, as I said and as I wrote in my report, climate change is a global phenomenon, not a national one. So, of course, in Canada, we can impose new regulations like Trudeau did with the carbon tax. But if we think that Canada is the only country in the world that can fight climate change, I think it’s a big mistake because it’s a global phenomenon. And we should try to collaborate with other countries and try to make them understand that, for example, a carbon tax can be beneficial for the environment while not harming our businesses only here in Canada.

Tracy: And the clean fuel standard, I guess, maybe hasn’t received as much public attention as the carbon tax, for example. What else do you think Canadians need to know about the CFS?

Miguel: Well, I think it should really receive more public attention because, as you said, the carbon tax, it did. But now the CFS, it’s like a carbon tax in the sense that costs will be passed along to consumers. So, everyone, every Canadian should be aware of that. And I feel like right now during the pandemic, we will not discuss it so much because we have other subjects, of course, we need to talk about. So, if the CFS does not get public attention, I think it’s quite dangerous because, as I said, the permits in there are really $200 per tonne of carbon dioxide emissions. That’s a lot. And at the end of the day, that’s consumers that will pay a part of it. So, we should all be aware of that. And I really hope that our media talk about it more in the next couple of weeks when the federal government releases their report.

Tracy: Miguel, thanks very much for your comments today and thank you for joining our podcast.

Miguel: Thank you for inviting me.

Tracy: Miguel Ouellette is an economist and director of operations with the Montreal Economic Institute, online at iedm.org. Thanks for joining Energy Examined. Please subscribe and tune in for future episodes.


In this article, Context speaks with:
  • MO
    Miguel Ouellette Director of Operations and Economist, Montreal Economic Institute