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CTA Submission: Technical Paper on the
Federal Carbon Pricing Backstop
Canadian Trucking Alliance
June 2017
Canadian Trucking Alliance
555 Dixon Road, Toronto, ON M9W 1H8
Tel: 416-249-7401 – email: govtaffairs@cantruck.ca
Follow us on Twitter @cantruck and on the internet at www.cantruck.ca
Our File: 170630-cta-submission-technical paper on the federal carbon pricing backstop (final).docxCTA Submission: Technical Paper on the Federal Carbon Pricing Backstop
Who We Are
The Canadian Trucking Alliance (CTA) is a federation of the nation’s provincial
trucking associations. With over 4,500 member carriers, CTA represents a broad
cross-section of the industry including companies of all sizes, regions, commodity-
based service and specialty. Our members employ approximately 150,000
Canadians and are responsible for providing upwards of 70% of the country’s
road freight needs.
About the Industry
Put simply, trucking is the dominant mode of freight transportation because of the
flexible, timely, door-to-door service that only trucks can provide. The industry
generates over $65 billion in revenues per year, with the for-hire sector
accounting for over $40 billion of that total. In terms of GDP, the transportation
services sector represents 4.2% of total economic output, or $53 billion. The for-
hire trucking sector accounts for 31% of the total share – more than air (12%), rail
(11%) and marine (2%), combined. The trucking industry is responsible for
creating over 400,000 direct jobs in Canada – 300,000 of which are truck drivers.
Nearly 1% of the Canadian population and over 1.5% of the labour force are truck
drivers by profession. The for-hire segment of the industry produces roughly $24
billion in personal income on an annual basis, which in turn generates $4.2 billion
in personal income taxes and $4.1 billion in indirect taxes for government.
Economic Importance of Trucking
Trucking moves approximately 90% of all consumer products & foodstuffs and
almost two-thirds (by value) of Canada’s trade with the United States. Trucking
serves every segment of the economy from the natural resource sector in western
Canada, to the manufacturing community in central Canada and the fisheries in
Atlantic Canada. When our customers are negatively impacted by an economic
downturn, our sector quickly feels this financial chill. Consequently, trucking is a
derived-demand industry. As the economy goes, so goes trucking. Trucking is
often used as a leading indicator of economic activity; it’s usually six months
ahead in terms of any downturn or recovery in economic activity. Not surprisingly,
current economic conditions – while not entirely negative (depending on the
region and the commodity) – are somewhat sluggish, reflecting a general
uncertainty felt by many, especially in the trade community.
Fundamentals
The trucking industry competes on very slim margins and is highly competitive.
The operating ratio (OR) of Canadian Class 1 railways are in the 0.63-0.65 range.
For most trucking companies, an acceptable OR would be 0.95. Trucking is a high
revenue, low-margin business where the difference between profits and loss on a
CTA | 1CTA Submission: Technical Paper on the Federal Carbon Pricing Backstop
load can be measured within a few dollars. This is partly due to the highly
competitive nature of the industry, with the primary benefactor being Canadian
consumers. As the Conference Board of Canada notes, approximately 87% of
productivity gains made by the for-hire trucking industry since 1986 have flowed
through to customers in the form of lower prices. The Canadian trucking industry
also competes within international contexts. With north-south trade being critical
to the economy and the industry, competition with large US fleets with natural
advantages related to economies of scale is an everyday reality for Canadian
fleets. Needless to say, every cent counts to the Canadian trucking industry.
Fuel Surcharge
A fuel surcharge is an extra fee charged by trucking companies (or third parties)
to cover the shifting cost of fuel. It is calculated as a percentage of base rate and
is usually added to a shipper's freight bill to cover the cost of operations. For most
trucking companies in North America, a fuel surcharge is an important mechanism
to help shield carriers from volatile or fluctuating fuel prices. For Canadian
carriers, there are two primary systems that are used, or impact their operations.
(1) Freight Carriers Association (FCA) fuel surcharge. FCA is Canadian-based
and is primarily domestically focused. FCA is able to capture (to a degree)
the price of carbon in their surcharge formula.
(2) US Department of Energy (DOE). In the United States, the US National
Average On-Highway Diesel Fuel Prices is released every week by the
Department of Energy.
For American carriers, the US Department of Energy’s numbers form the basis for
fuel surcharge calculation and of course these numbers do not capture any
Canadian carbon pricing mechanism, be it a tax, cap and trade system, provincial
or federal. While the FCA system is able to capture carbon pricing in the four
Canadian jurisdictions that currently price carbon, the FCA surcharge is only used
by Canadian based customers with U.S based customers insisting on only using
US DOE numbers. This exact situation is already a competitive issue for
Canadian carriers, which would only be made worse by the prospect of a new
Pan-Canadian system with an escalating carbon price to $50 per tonne.
Fuel surcharges are also calculated and adjusted frequently, in most cases, on a
weekly basis. This means that for the backstop and top-up system to work for the
trucking industry, the price impact of this system must be captured at the pump. In
the Technical Paper it is stated this is also the governments intended strategy.
However, on page 14 there is also a reference to a self-assessment to determine
the amount of carbon levy owing, or the amount of relief the carrier is entitled to.
While it is understood that there is a situation in which the carbon levy may be
returned (e.g. fuel purchased in a backstop jurisdiction, but burned outside of
CTA | 2CTA Submission: Technical Paper on the Federal Carbon Pricing Backstop
Canada), it is unclear how there could be a situation in which a carrier will owe. If
the price of carbon is captured at the pump, then how could there be a situation in
which a carrier owes for the carbon levy beyond what they have already paid at
the pump? Further clarity on this point is needed.
Environmental Regulations & Trucking
While research and development on new technologies remains a strong focus for
many original equipment manufacturers (OEMS), there still lacks a widely
available and wholly-viable alternative engine (e.g. electric/hydrogen) available for
mass deployment in the heavy truck sector. This means the diesel engine will
likely remain the workhorse of the trucking industry for the foreseeable future. This
reality has been acknowledged by the US Environmental Protection Agency and
Environment Canada in various air quality and carbon-reduction legislation.
Nonetheless, the trucking industry is the only freight transportation mode in
Canada that uses engines that are regulated to deal with air quality and
greenhouse gas emissions. The air quality regulations were tightened in the early
2000s, leading to production of what the US Environmental Protection Agency has
described as the ‘near-zero emission’ engine. Since 2010, every truck sold in
Canada operates a near-zero emission engine. The first phase of greenhouse gas
regulations took effect in 2014 with a second phase scheduled for 2018, which
includes a seven-year phase-in of various standards. The phase two regulations
govern tractor design, engine and trailer performance to reduce carbon emissions
from heavy trucks. The regulation is projected to reduce heavy truck emissions in
Canada by 100 million metric tonnes. As the only mode in Canada to be regulated
on these two fronts, the trucking industry is doing its part to reduce its
environmental footprint.
CTA’s Views on Carbon Pricing
CTA believes that at no other point in history have the trucking industry’s
economic goals been so closely aligned with society’s desire to combat climate
change by reducing emissions from the burning of carbon fuels. Carbon pricing is
being promoted as an essential measure in this mission. In a general sense, CTA
generally supports the assertion that in a perfect world that sending appropriate
market signals by putting a price on something or an activity is the best and most
efficient way of encouraging change. Accordingly, CTA is not conceptually
opposed to carbon pricing; although given the choice between a carbon tax and a
cap-and-trade system, the Alliance would prefer the former because it is more
transparent and easily calculated.
From CTA’s perspective, the pricing mechanism must be properly structured. In
other words it must be:
CTA | 3CTA Submission: Technical Paper on the Federal Carbon Pricing Backstop
• Revenue-neutral, with the revenues raised being reinvested back into
industry to accelerate investment and industry adoption of environmental
solutions
• Easily understood and transparent
• Coordinated on a national and international (Canada-US) basis to avoid
regional competitive disparities
• Efficient to administer
• Ensures equity between the freight carrying modes
Governments must also do their part by removing regulatory and other barriers
that do not support or stand in the way of the industry’s efforts to become more
fuel-efficient. For example, the federal government has recently cancelled truck
and fleet operators’ ability to apply for refunds for diesel fuel used to generate
electricity from temperature-controlled trailers; power take-off units; and auxiliary
power units (APUs)/in-cab heaters – all technologies that greatly assist our
industry in meeting mandated GHG emission reduction targets.
When considering carbon pricing mechanisms, it is essential government at all
levels recognize that Canada and the Canadian supply chain must still compete
globally.
General Comments on the Technical Paper on the Federal Carbon Pricing
Backstop
While CTA is not conceptually opposed to pricing carbon, CTA has concerns with
the direction as outlined in this technical paper. The reasons are as follows:
• The technical paper proposes dramatic carbon pricing increases in a short
period, without factoring in overall and sectorial economic conditions.
• The creation of a federal system for fuel reporting proposed in the technical
paper appears to create an administrative burden for the trucking industry.
• The price impact of carbon pricing must be captured at the pump to allow
the trucking industry to price its services properly.
• The technical paper makes no recommendations on how carbon pricing
and the revenue raised will be reinvested back into our sector to reduce
carbon emissions from trucking equipment.
• As referenced in the technical paper, we must ensure that all foreign
carriers must register with the CRA for the purposes of carbon remittances.
Details on how this will be administered and enforced are still outstanding.
CTA | 4CTA Submission: Technical Paper on the Federal Carbon Pricing Backstop
The technical paper also includes exemptions for certain farming activities as well
as fuel used in the marine and aviation sectors. From CTA’s perspective, it is
unclear why different modes would have different rules. If this is truly about
emissions, then all industries should be treated equally. However, if the
exemptions remain, the Canadian trucking industry should also receive relief from
the levy.
No Dramatic Increases Without an Economic Impact Analysis
Fuel is a trucking’s company’s first or second leading operating cost (along with
labour). The technical paper calls for all provincial carbon prices to increase 400%
over a four-year period. 1 This works out to a 20% increase over the current
wholesale price of diesel in 2017.2 With choppy GDP growth the norm these last
five years in Canada and the U.S., how can we as a nation commit to such
aggressive carbon price increases and expect our sector to either pass these
costs onto their customers or absorb them? At operating ratios of 0.95 or higher,
our sector cannot absorb these costs. Furthermore, as our sector competes with
US trucking companies that will not face similar carbon pricing pressures during
the 2018 to 2022 period, CTA has serious concerns about the Canadian trucking
industry’s ability to stay competitive in the North American context.
Source: Page 6 of the Technical Paper on Federal Carbon Pricing Backstop
CTA is also concerned about the competitive impact this aggressive carbon tax
will have on our customers. The proposed floor, beginning in 2018 with $10/tonne,
could be manageable for the supply chain in today’s economic environment.
However, the impact of $50/tonne in 2022 is much more difficult to assess. Based
on the current situation, the impact of carbon pricing at this level could very well
1
From 2.74 cents per litre in 2018 to 13.69 cents per litre in 2022.
2
Based on a national wholesale average (as of May 23, 2017) of 67.3 cents per litre.
CTA | 5CTA Submission: Technical Paper on the Federal Carbon Pricing Backstop
be detrimental to the Canadian trucking industry. Furthermore, with such an
aggressive timeline, this policy has the potential to send a chill through the
economy well in advance of 2022. Thus, CTA recommends the federal
government not set any price on carbon above $10 tonne for the near-term.
The Need for Clarity
To support a rising national floor price of carbon, the technical paper proposes the
creation of what appears to be a federally-administered system, similar to the
International Fuel Tax Agreement (IFTA), for carbon tax reporting. This model,
would wrestle away provincial control of carbon pricing. The federal government is
apparently trying to put the Pan-Canadian carbon pricing horse back in the barn,
potentially creating an administrative burden for trucking and railway firms. The
technical paper states: “that inter-jurisdictional road and rail carriers will be
required to file a return with the CRA and report fuel purchases made inside and
outside each backstop jurisdiction, as well as the distance travelled inside and
outside each backstop jurisdiction in order to self-assess the amount of carbon
levy owing, or amount of relief to the carrier, as the case may be.” The proposal
seems to suggest: (i) if a province has a carbon pricing system and sets the
pricing level below the proposed federal floor level, the carrier – based on their
mileage records – must remit carbon taxes owed to the federal government when
carbon pricing differences exist between the provincial rate and the proposed
federal floor level. (ii) This seems to suggest that for provinces with no provincial
carbon pricing system, the carrier must remit based on annual mileage in that
province, owing carbon taxes to CRA based on the federal floor price that year.
With that said, it is also stated in the technical paper that the price will be captured
at the pump. It is unclear how these two elements will interact. (iii) It also seems
that this may be how the government intends to capture fuel purchased outside of
Canada. If this is the case, it needs to be clearly articulated and further details
need to be provided on how this will relate to both Canadian and international
carriers.
On the surface, it is unclear exactly how this self-assessment would work. While
CTA understands that this is also likely the mechanism through which carriers
would seek reimbursement for fuel burned that is not subject to federal carbon
pricing, how this will work in practice and the burden this will impose on carriers
remains unclear. It is also unclear how the carbon pricing paid at the pump should
be factored into this self-assessment. Since the release of the technical paper,
CTA has met with Government of Canada officials to discuss how such a system
could be administered with minimum impact on the industry. These discussions
have been productive to date and need to continue as this proposed system
begins to take shape.
CTA | 6CTA Submission: Technical Paper on the Federal Carbon Pricing Backstop
Inequity Between the Modes
All truck operators and commercial buses – domestic and international – that
transit through a backstop jurisdiction will be required to register with CRA, report
on levies paid and file regular returns. However, in the case of marine, the
technical paper states: “the levy will only apply to fuel used for commercial marine
transportation that occurs between two points in the backstop jurisdiction”. The
technical paper then goes on to state, “marine carriers…. will be entitled to relief
for levy paid on fuel that is used in interjurisdictional journeys (e.g., trips between
a point in the backstop jurisdiction and a point outside the backstop jurisdiction).”
This exact same exemption is also included for aviation. Alternately, for road and
rail, the technical paper states: “the levy will apply both to fuel that is used during
a journey that starts and ends in the same jurisdiction (intra-jurisdictional travel)
and to fuel that is used during the portion of an inter-jurisdictional or international
journey that occurs in a backstop jurisdiction.” CTA’s interpretation is that marine
trips that originate in Canada and end in, for example, the U.S. will be entitled to
relief from the levy for the entire trip. This exact same exemption is also included
for aviation. For road and rail, only the fuel burned in a non-backstop jurisdiction
(e.g. the US) will be entitled to relief from the levy. Simply put, this double
standard is unacceptable. If this plan is truly about emissions, then it shouldn’t
matter which mode the emissions come from. It is CTA’s view that equity between
the modes must be assured.
Where Does the Money Go and What Policy Purpose Does it Serve?
Trucking is the only freight mode to use carbon-regulated equipment. The first
phase of this regulation began in 2014. The second phase is set to begin in 2018
and will be ramped up over a seven-year period. These carbon regulations will
cover tractor designs, engines and trailers. It will cost the trucking industry billions
of dollars to update its equipment to the new standards over the phase in period.
These regulations also acknowledge the diesel engine will be the primary fuel
propelling commercial trucks during this period. In turn, the technical paper makes
no commitments for what the revenue raised through carbon pricing on diesel fuel
will be used for. What policy purpose does applying a carbon price to diesel serve
if the Government of Canada is not reinvesting the revenue back into trucking? As
mentioned, trucking is the only mode to be regulated from both air quality and
carbon perspectives. Making diesel more expensive for trucking fleets will not
create the emergence of a viable alternative to diesel fuel between the 2018 and
2022 period. The government needs to provide a purpose for this policy. CTA
believes the only sound policy rationale for mandating carbon pricing on diesel
fuel for trucking fleets is to assist the trucking industry in introducing and adopting
proven carbon reducing technologies under Environment Canada’s Phase II
regulation.
CTA | 7CTA Submission: Technical Paper on the Federal Carbon Pricing Backstop
In the technical paper, it is stated that the Pan-Canadian system will “return direct
revenues from the carbon price to the jurisdiction of origin” which will apply to both
backstop jurisdictions that do not have a carbon pricing mechanism and those that
have pricing mechanisms already in place, but may be subject to the “top-up”.
While it is CTA’s view that the federal government is in the best position to
reinvest this revenue into compliance programs for Phase II GHG regulations for
tractors, engines and trailers, if the revenue does flow back to provinces it must
do so with strict conditions that it be dedicated back to industry in some form. In
the government’s October 2016 statement on the Pan-Canadian Approach to
Pricing Carbon pollution, it was stated that “pricing pollution will drive innovative
solutions to provide low-carbon choices for consumers and businesses.” In the
2017 technical paper, it states that the goal of this approach is to “ensure that
carbon pollution pricing applies to a broad set of emission sources with increasing
stringency over time in order to reduce GHG emissions at lowest cost to business
and consumers and support innovation and clean growth.” If Canadian trucking
companies are to continue to drive innovation within their fleets and this is to be
done with the least amount of impact on their businesses as possible, then
ensuring these revenues are dedicated to industry and do not simply flow into
general revenues is vital to this integrity of this proposed system.
Federal Excise Tax on Diesel
In 1985, the Mulroney government introduced the federal excise tax on diesel fuel
for the express purpose of raising revenue to help pay down the government
deficit. It was supposed to be a temporary measure until fiscal balance was
restored. Unfortunately, when the government achieved its objective, the excise
tax remained, even during times of surpluses. It remains today at 4 cents per litre
on diesel fuel sold in Canada. Furthermore, those funds are not dedicated to
infrastructure investment, or environmental purposes or any specific policy
purpose. The revenues it generates flow into general revenues. Today, the tax
generates about $1 billion per year, with the trucking industry paying the lion’s
share. Although CTA would never refuse a straight tax reduction – and while there
is ample good reason to eliminate the excise tax on diesel fuel outright – this tax
could also be rebranded, repurposed or replaced. For example, the federal excise
tax on diesel fuel could be replaced with a carbon tax at $10/tonne (or 2.74 cents
per litre). This would provide policy purpose for revenue. For industry, this would
provide a system that is easily administered, easily captured in fuel surcharge
formulas, and is in a tolerable range for industry. In jurisdictions that do not have
carbon pricing, this would provide coverage. Where carbon pricing already exists,
carriers could simply apply for refunds for the portion they have already paid.
CTA | 8CTA Submission: Technical Paper on the Federal Carbon Pricing Backstop
Conclusion
While the Canadian trucking industry has been at the forefront among
transportation modes in our nation’s battle to reduce carbon emissions, the
Canadian Trucking Alliance, although not inherently opposed to carbon pricing,
cannot support the direction as outlined in the technical paper on the federal
carbon backstop.
The following is a summary of CTA’s primary concerns:
• The technical paper proposes dramatic increases in carbon pricing in a
short period without factoring in overall and sectorial economic conditions.
• The system proposed in the technical paper appears to create an
administrative burden for the trucking industry, through the creation of a
federal system for fuel reporting.
• The federal system creates a number of competitive issues between
Canadian and U.S. carriers.
• The federal system would compound issues relating to fuel surcharge.
• The federal system must ensure foreign trucking companies will also have
to register with the Canada Revenue Agency (CRA) for the purposes of
carbon remittances.
• The technical paper makes no recommendations on how carbon pricing
and the revenue raised will be reinvested back into our sector to reduce
carbon emissions from trucking equipment.
• If revenue from the federal carbon pricing system flows back to the
provinces, it must do so with strict conditions. The revenue must be
reinvested back into industry and not simply flow into general revenues.
• The technical paper establishes a carbon pricing system that will generate
inequity between the freight modes.
• The technical paper also includes exemptions for certain farming activities
along with exemptions in marine and aviation. It is CTA’s view, the
Canadian trucking industry, especially those exposed to international
competition, should also receive relief from the levy if the government is
committed to exemptions for certain sectors.
• The federal government already has a road-based tax for trucking (federal
excise tax on diesel) which currently serves no policy purpose. This tax
could be repurposed as a carbon tax at $10/tonne, with minimal disruption
to the industry, but maximal effect.
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