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AFB 2024: Regulation

Alternative Federal Budget: what the federal government could achieve on regulation

August 24, 2023

8-minute read

Introduction

Regulatory capture is a term to describe when corporations co-opt of regulatory agencies and subvert the public interest to benefit the private interests of the regulated industries.1 It has affected multiple sectors including transportation, pharmaceuticals, food, nuclear, fossil fuels, environment, construction, trade, and investment.

In industries where regulatory capture has occurred, companies can shape regulations governing their operations—block or delay new regulations and exert pressure to remove or dilute existing regulations, which they frame as “red tape” that makes them less competitive.2

Lobbyists set political agendas in private meetings with cabinet ministers, committee chairs, and senior bureaucrats, among other lobbying activities.3

Besides reviewing the overall regulatory regime, this chapter will profile rail transportation 10 years after the Lac-Mégantic oil train disaster; and the climate impact of fossil fuels production and financing.

Overview

Governments have eroded resources for most regulatory agencies over the last four decades, forcing regulators to depend on corporations to develop and manage their safety oversight regimes—in effect, self- regulation. This process has hollowed out enforcement and accountability provisions.

The “revolving door” is a common feature of regulatory capture.3 It involves the movement of senior employees between regulatory agencies and regulated industries, often enabling the interests of the latter. Conflict of interest laws, lobbying regulations5 and whistleblower protections6 strongly favour corporate interests.

Under the latest Annual Regulatory Modernization Bill,7 the government is proposing granting federal regulatory organizations the power to set up regulatory sandboxes as well as incorporation by reference documents. These initiatives are framed in terms of how to reduce the burden of regulation on companies and government, rather than how to ensure regulations protect public health, safety, and the environment.

Incorporation by reference8 (IBR) means that instead of putting all the wording of a regulation in the text of a regulation, it would simply refer to another document created outside the standard regulatory process. Changing regulations via IBR documents is faster, less transparent, and less rigorous than changing actual regulations. For example, the federal government’s Seed Regulatory Modernization process currently underway is considering proposals to move large areas of seed regulation into IBR,9 something that the corporate seed lobby10 has been calling for since at least 2018.

The government will likely use regulatory sandboxes, which allow companies to try out different regulatory approaches, to justify a shift to more corporate self-regulation.

Case 1: Ten years after Lac-Mégantic the window for another disaster remains open

The Lac-Mégantic disaster was the consequence of four decades of deregulation, privatization, tax cuts, and austerity—all of which systematically eroded transportation safety protections. It was a perfect storm of corporate negligence and regulatory failure.

As volumes of oil by rail skyrocketed, resources within the regulatory agency remained frozen. The railway/petroleum lobby successfully argued that additional safety regulations proposed to address the danger were unnecessary. They also successfully argued that the rules should be changed to allow trains carrying dangerous goods to operate with a single crew member.

Montreal, Maine & Atlantic [MMA]—a company with a poor safety record, on a poorly maintained track, the first to operate under the new single operator rule—was hauling huge volumes through Lac-Mégantic in tank cars. Both Canadian and US transportation safety boards had warned against carrying dangerous goods in those cars.

In the aftermath of the disaster, three front-line workers were criminally charged and acquitted. No corporate executives, owners, directors, or senior public servants have been held legally liable.

The still-flawed safety oversight regime—Safety Management Systems [SMS]11—has continuously been on the Transportation Safety Board’s (TSB) Watchlist since the list was created to highlight “issues posing the greatest risk to Canada’s transportation system.”

The number of uncontrolled rail movements has risen significantly between 2010 and 2022. The TSB 2022 Watchlist concluded that unplanned/uncontrolled movement of rail equipment continue to “create high-risk situations that may have catastrophic consequences.”12

Companies have not yet implemented effective work-rest requirements for workers, in accordance with sound science. Fatigue remains on the TSB Watchlist as posing a safety risk to operations.13

The Auditor General’s 2021 report on rail safety concluded that safety management systems expressed serious focus on checking off the regulatory boxes: not whether they were effective in reducing the risk of accidents.14

Case 2: Fossil Fuels and the climate crisis

The latest projections show Canada will almost certainly fail to meet its own target to reduce greenhouse gas emissions by 40 to 45 per cent by 2030.15 The Environmental Commissioner in the Auditor General’s office, has criticized the government’s record as a litany of broken promises: “We have been repeatedly ringing the alarm bells. Now, these bells are almost deafening.”16

Although solar power investment globally is set to outstrip spending on oil production investment in 2023.17 Total investment by the petroleum industry on low-emissions sources of energy is less than five per cent of the total spent on fossil fuel development. The government has provided huge subsidies for unproven carbon capture and storage technology which is ineffective in reducing carbon emissions and only serves to delay the transition away from fossil fuels.18

Nor has the federal government been able to effectively regulate financial institutions’ investments in the fossil fuels industry in accordance with its climate commitments.

Since 2016 renewable energy has taken seven per cent of a total $2.5 trillion in bank loans and bond underwriting for energy activities.19 The Big Five Canadian banks all made the list of top 20 funders globally after investing more than $1 trillion in fossil fuel companies since 2016.

Canada’s largest banks have committed to voluntarily align their investments and lending with the United Nations net zero emissions target as part of the Net-Zero Banking Alliance.20 However their net-zero pledges are highly suspect, bordering on greenwashing,21 and therefore require strict government regulations.

Actions

The AFB takes the following measures aimed at confronting regulatory capture and ensuring public health, safety, and the environment takes precedence over profit.

The AFB will restore resources to regulatory agencies. Strengthen in- house professional analytical and research expertise to effectively submit and evaluate regulatory proposals; evaluate company risk assessments and conduct independent systemic risk assessments. Ensure safety oversight regimes have the necessary surveillance and enforcement capacity.

The AFB will ensure regulatory resources are paid out of general tax revenue rather than through cost recovery under which company priorities often supplant safety.

The AFB will ensure that regulatory agencies have the necessary resources to carry out their roles and responsibilities including using the transparent and publicly accessible Canada Gazette process for all proposed regulatory changes to ensure that Incorporation by reference and regulatory sandbox mechanisms will only be allowed on a case-by- case basis for purely technical documents.

The AFB will curb the “revolving door” by measures including training for those coming from industry on their duties as guardians of the public interest and a cooling-off period limiting their movement back to industry or lobbying.

The AFB will reform civil and criminal liability regimes to hold politicians, senior officials, company executives, directors, and owners to a higher standard of accountability, including legal liability, for decisions that endanger public health, safety, and the environment.

The AFB will make changes to the government’s regulatory policy, the Cabinet Directive on Regulation, notably eliminating the one-for-one rule and prioritizing the precautionary principle over competitiveness considerations when making decisions about health, safety, and the environment.22

The AFB will ensure regulations are consistent with legislation, as described by former Department of Justice General Counsel Edgar Schmidt,23 by establishing a regulatory oversight committee.

The AFB will provide financial and other forms of support to public interest groups, municipalities, etc., to enable broad-based citizen engagement in the legislative and regulatory process ($10 million a year). Mechanisms for public participation in regulatory processes, including notice and comment requirements, the Let’s Talk Federal Regulations platform, and rights of third-party appeal, need to be significantly strengthened.24

The AFB will strengthen access-to-information laws to require lobbyists to make public more information about their activities and other company information currently shielded from public access by “commercial confidentiality” regulations.

The AFB will ensure that international bodies charged with harmonizing regulations across political jurisdictions, are accountable to parliamentary and public scrutiny to ensure they are not simply forums for behind-the-scenes deregulation.

The AFB will ensure that regulatory agencies are not conflicted by dual mandates of economic/promotion and safety protection, and do not report to ministers with dual mandates, as exists in the transportation and nuclear sectors. Regulators should become stand-alone agencies that report directly to parliament.

The AFB will implement robust whistleblower protections under an independent office, enshrined in legislation.

Canada’s major pension funds continue to invest heavily in fossil fuels. Recent incremental reductions are far from what is needed to end their investments in fossil fuels. While most have voluntarily made net- zero emissions commitments, they are variable and vague. The AFB will establish a net-zero standard and amend the Income Tax Act to introduce a Net-Zero rule requiring pension funds to demonstrate net-zero alignment in order to maintain full tax-exempt status.25

The AFB will support Senator Galvez’s Climate Aligned Finance Act26 (S-243)—which seeks to hold financial institutions accountable for investments that increase climate risk. It is still stalled in the Senate.

Require the federal supervisor, the Office of the Superintendent of Financial Institutions (OSFI), to mandate climate targets and make adequate capital requirements (buffers) among banks proportional to the climate risks that exist in their businesses and in the broader economy. If enacted, it would be an important step toward phasing out fossil fuel production in Canada in line with International Energy Agency and UN-IPCC warnings.

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