2017 Federal Budget Should Focus on Shift to Low Carbon Trucking

By: David Bradley
Bradley_Web52The 2017 budget will likely be tabled sometime in February or March. The focus of CTA’s submission this year is on GHG-reduction.

The industry wants to transition to lower carbon heavy trucks, trailers and fuel. Why wouldn’t it? Diesel is the second largest component of operating costs. But, there are significant obstacles and costs associated with the transitioning from initial stage adoption to a mature lower carbon market.

For example, currently the only alternative to diesel fuel for large heavy trucks showing some potential – at least for some applications — are natural gas tractors which produce 17% lower GHG than diesel but which are about $60,000 or 30-40% more expensive to purchase than a conventional diesel tractor and require a major retrofit of maintenance shops. Add to that the lack of distribution and re-fueling infrastructure in Canada and you see the problem.

Trucking is unique in that unlike other sectors, it is subject to both federal GHG reduction regulations and carbon pricing. The Government of Canada has announced it will not only implement aggressive Phase II GHG-reduction standards for heavy trucks/trailers, but it will also introduce a minimum price on carbon of $10 per tonne in 2018, rising by $10 per tonne per year to $50 per tonne by 2022.

Both measures are bound to increase the costs of new tractor-trailers (and retrofitting existing equipment) and of the cost of diesel fuel. A $50 per tonne carbon price could increase diesel prices by 11 cents per litre – or about 17.5 percent of current wholesale prices. These increases are not easily absorbed in a low margin industry like trucking.

In going down the carbon pricing road in Canada, CTA would have preferred a consistent, national approach. But, that horse has left the barn. Several provinces have already introduced (or are in the process of introducing) carbon pricing mechanisms. British Columbia and Quebec have a carbon tax. Quebec also has a cap and trade system that Ontario is joining. Alberta is taking a hybrid approach. The federal government is coming somewhat late to the game. It needs to avoid adding further to the burden on the Canadian supply chain which must remain competitive continentally and globally.

It is also imperative that revenues generated from federal carbon pricing and from the federal excise tax on diesel fuel (which serves no policy purpose and is an archaic way to tax business inputs at odds with the GST/HST) do not simply flow to the black hole of general revenue or are simply handed over to the provinces (which appears to be the federal government’s approach), but are dedicated to supporting early adoption of GHG-reduction equipment, technologies and alternative fuel in the industries affected.

Trucks consume about 18 billion litres of on-road diesel fuel annually. The excise tax generates an additional three-quarter billion dollars a year from the trucking industry. A federal carbon pricing program could generate $2 billion in government revenue. These funds should be plowed back into accelerating GHG-reduction by the industry.

In its pre-budget submission, CTA recommends three measures.

The first is to accelerate the capital cost allowances (CCA) for new, GHG-compliant/natural gas powered tractors and trailers. In Canada, tractors (Class 16) are currently depreciated at a 40% per annum rate on a declining balance basis. (By comparison, in the US tractors are depreciated on a double declining balance basis; 3-year asset vs 7 years in Canada). Trailers (Class 10) are depreciated at a 30% declining balance rate.

There are several precedents for this in other industries. The federal income tax regulations provide accelerated CCA (30% & 50%, respectively, on a declining-balance basis) for investments in specified clean energy generation and conservation equipment as an exception to basing CCA rates on the useful asset life. The 2006 federal budget accelerated the CCA for energy generation equipment using renewable fuel in pulp and paper sector. The 2008 budget introduced accelerated CCA for new railway locomotives to 30% from 15% “to encourage rail operators to acquire newer, more fuel-efficient fleet of locomotives…” The 2010-11 Quebec budget increased CCA rates for new heavy trucks to 60% from 40%; 85% for natural gas tractors.

Our second recommendation is to establish a Trucking Industry GHG-Reduction Fund from the proceeds of carbon pricing and the federal excise tax on diesel. to provide an additional capital injection to assist/promote investment and allow the market to mature.

Such a fund would complement programs that exist in some provinces such as the $28.3 million, 3-year, Quebec Programme Ecocamionnage introduced in 2014 which provides financial assistance (up to $1 million per applicant per year) to freight transportation for acquisition/installation of technologies to reduce GHG emissions like aerodynamic fairings and deflectors, chassis skirts, low rolling resistance tires, anti-idling devices and natural gas tractors, or the Ontario Green Commercial Vehicle Program which will, starting in 2017/18, provide $125-$170 million to buy low-carbon vehicles/technologies, including natural gas trucks and shop conversion, aerodynamic/anti-idling devices, electric trailer refrigeration, etc.

The federal NRCAN Anti-Idling Device Program which existed from 2003-2006, provided a 20% rebate to trucking companies for installing prequalified cab heating/cooling systems is a good precedent. A $5.8 million injection from NRCAN generated $30 million industry investment (13,280 units) reducing idling time by 2,200 hours per truck and reducing GHG by 200,000 tonnes per year.

Finally, the federal government should restore the long-standing excise tax exemption for diesel fuel used by anti-Idling devices which was eliminated in the 2016 budget and is inconsistent with reducing GHGs.

Will the financial minister, Bill Morneau, act on any of these recommendations? Time will tell.

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