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REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Regulations.)
Proposed Regulations | Regulatory Impact Analysis Statement

Description

Introduction

The purpose of the Regulations is to establish a system by which the CFIA as competent authority can regulate the use of the "Canada Organic" agricultural product legend. This national organic regime would facilitate international market access, provide protection to consumers against deceptive and misleading labelling practices and to support the further development of the domestic market. The need for a federal regulatory regime has been identified and supported by the Canadian organic industry. These objectives would be met by incorporating the current voluntary system into a federally regulated framework.

Organic agricultural production is a management system designed to produce crops and livestock in an ecologically stable way. Soil fertility is maintained, animals are raised in a manner appropriate to their behavioural requirements and synthetic fertilizers and pesticides are not used. The regulations would restrict the use of the agricultural product legend to those products which adhere to these principles.

In Canada, the organic industry has been growing at a rate of 15 to 20 percent annually for the past decade with approximately 3,670 certified organic farms in 2004 and is producing products whose retail value is estimated at $986 million. This industry represents a growing sector of the global food industry and is largely consumer driven. The most significant international markets for Canadian organic products are the European Union (EU) and United States (US).

Several of Canada's trading partners have developed mandatory regulations prescribing requirements for products traded as organic. The EU currently has a mandatory organic standard and a certification system for agricultural products. Under the current European regulations, the EU requires all countries exporting organic food to the EU be on an approved third-country equivalency list by December 31, 2006.

The United States Department of Agriculture's (USDA) National Organic Program (NOP), currently accredits Canadian certification bodies to certify Canadian organic producers for export to the United States. Therefore, producers currently shipping to the US may continue to do so once these regulations come into force. Furthermore, it is anticipated the USDA will recognize these regulations as equivalent to their own which would allow increased access to the US market.

Currently, the provinces of British Columbia and Quebec have regulated organic production systems in place. For the remaining provinces, voluntary systems are used. Under the proposed system, British Columbia and Quebec would be able to apply for recognition as accreditation bodies and as such be integrated into the Canada Organic Regime (COR). All provinces would retain jurisdiction over intraprovincial trade.

Currently, multiple organic standards are used to certify products as organic in Canada. As a result, organic producers frequently pay multiple fees for several different certification systems. Due to the EU deadline and also as a result of the desire for a single national standard, the Canadian organic industry has requested a federal regulatory system to support the continued development of the industry.

Proposed Regulatory Framework

The proposed organic regime would build on the existing system of domestic accreditation and certification bodies to provide credibility and a basis for evaluation. CFIA has established criteria based on ISO guidelines, which can be used for the assessment and recognition of these organizations.

The Canada Agricultural Products Act is being used as the enabling legislation under which these regulations have been developed. Organic products must continue to meet the requirements set out in the Consumer Packaging and Labelling Act, the Food and Drug Act, and all other applicable legislation and regulations.

The Organic Production Systems General Principles and Management Standards developed by the Canadian General Standards Board (CGSB) would form the basis of the regime. The proposed COR would be designed such that the Government of Canada would assume oversight of the regime with the CFIA acting as the competent authority, and would integrate existing accreditation and certification bodies into the system, provided they meet the prescribed requirements.

The CFIA would permit the use of an organic agricultural product legend on products which have been certified as organic by certification bodies accredited by CFIA accredited accreditation bodies. When referring to certified organic products, certification bodies are attesting that CGSB organic production standards have been followed. The CFIA would verify compliance and carry out enforcement activities.

An early principle used in establishing the COR was that it would be cost recoverable. While industry is already covering a significant component of the costs associated with organic certification through fees to accreditation and certification bodies, resources would be required to manage the national program, to interface with certification and accreditation bodies, and to verify compliance and take enforcement action when necessary. Fees may be applied in the future to producers, import/exporters, processors, retailers and other individuals and organizations who choose to participate in the COR. The application of these fees would be done in strict adherence to the User Fees Act, a key principle of which is broad consultation with stakeholders and provincial partners.

Shipments of imported organic products must be accompanied by an attestation issued by the recognized competent authority of the country of origin. This requirement is not considered a barrier to trade and is similar to the requirements of many of Canada's major trading partners such as the US and the EU. From the date these regulations come into force, imported organic products must meet the intent of these regulations. Products which do not meet the intent of the regulations may still be imported into Canada but, will not be permitted to make organic claims.

Organic regulation is forecast to have a high degree of acceptance among consumers, producers, processors, provincial governments and other stakeholders in the organic sector. Feedback at public meetings has been mostly positive and supportive, and the organic industry has requested the Government of Canada to develop organic regulations.

Alternatives

In the development of these regulations the following three options were considered:

Option One - the Status Quo:

This option maintains the current system where producers, processors and handlers are self-governed through a network of certification bodies.

International recognition may be curtailed due to the lack of government oversight, or a competent authority. One of the key assumptions affecting the viability of this option is that foreign markets may be lost to Canadian exporters. The most obvious example is the European Union requiring trading partners to negotiate equivalency agreements by December 31, 2006. This would create a surplus of products normally destined for export, resulting in significant downward pressure on prices and net reduction in revenue for Canadian producers.

This option is not recommended as it would not address issues associated with trading partner requirements, deceptive and misleading labelling practices, and variations in standards. In addition, it would result in economic loss to the Canadian economy.

Option Two - Federal Regulation with Accreditation and Certification Delivered by a Third Parties - Recommended:

A single Canadian standard would be adopted, international recognition would be attained allowing continued access to export markets and consumers would be protected from deceptive and misleading labelling practices through regulatory controls.

Existing Canadian certification bodies and accreditation bodies that meet prescribed criteria would deliver certification and accreditation services, rather than the federal government. The CFIA would provide oversight, administration and enforcement of the regulations. The Canadian Organic Production Systems General Principles and Management Standards would be referenced in regulation.

This option is recommended since it builds upon the existing voluntary system, provides the best value for resources and is the option preferred by industry stakeholders and provincial and territorial partners. In addition this option is expected to be accepted by trading partners.

Option Three - Federal Regulation with Accreditation and Certification Delivered by the Government of Canada:

Only those products certified by the Government of Canada would have the right to make an organic claims in interprovincial or international trade. The major implication is the replacement of existing accreditation bodies and certification bodies by federal government staff. It is anticipated that approximately 30 businesses would close and 80 private sector jobs would be lost if this option was adopted. The adoption of this option would also result in the loss of goodwill with stakeholders. This option is not recommended due to the high cost of government delivery of this service, as well as increased costs to private industry.

Conclusion

Option two, Federal Regulation with Accreditation and Certification Delivered by a Third Party is the recommended option. This would allow for effective regulatory control, for protecting consumers from deceptive and misleading labelling practices and would facilitate international trade of organic agricultural products particularly, in regard to the EU.

Environmental Impact Analysis

The organic industry may produce some positive environmental impacts through improved soil management practices. The Canadian public may experience an environmental benefit if organic acreage continues to increase. Increased organic acreage may result in reduction of the use of synthetic agricultural chemicals. No negative environmental impacts are foreseen.

Consultation

Between January and April 2004, the Organic Task Force comprised of members from the CFIA, AAFC and DFAIT, conducted consultation sessions across Canada to assess the need for organic regulations. Stakeholders included representatives from provincial and territorial partners, producers, processors, retailers, import/exporters and other members of the organic sector. Initial consultations determined that there is consensus among stakeholders for regulations.

In response to the findings of these initial meetings, further consultation sessions were held to aid in the development of an organic standard and certification system. From November 2004 through November 2005, consultation meetings with stakeholders were held throughout Canada. Provincial and territorial partners also participated in consultation meetings held concerning the proposed regulatory regime between 2004 and 2005.

The majority of persons consulted agreed that a revised Canadian Organic Production Systems General Principles and Management Standards was required. This would serve as the foundation of the COR. It was also agreed that: the regime would include producers, processors, importers and distributors; the CFIA would act as the competent authority; existing accreditation and certification bodies that meet the CFIA criteria would be integrated into the COR; the requirements would apply to domestic and imported product, organic labelling would be permitted on products that meet the requirements of the regulations and an organic agricultural product legend may be used on certified organic products.

The majority of those consulted were supportive of Option two which is federal regulation with accreditation and certification by a third party, and supported the development of the proposed regulations.

Benefit-Cost Analysis

The Agency conducted a detailed cost-benefit analysis of the regulations. The study, Cost-Benefit Analysis of the Effects of Federal Regulation for Organic Products, was conducted from January - May 2005 with stakeholder input. It examined the economic impacts and the full range of social and economic effects of regulation on Canadian society. The study considered the costs and benefits to growers and producers, the sectors that support the organic industry (processors, wholesalers, retailers, exporters, accreditation bodies, certification bodies), consumers, the Canadian public at large, and the federal and provincial governments. The full document is available on our website at http://www.inspection.gc.ca/english/fssa/orgbio/coana/coanae.shtml or at http://www.inspection.gc.ca/francais/fssa/orgbio/coana/coanaf.shtml

In order to assess the impacts (i.e. the benefits and the costs) of the proposed Organic Products Regulations, the following three options were considered:

1. Maintaining the status quo whereby organic producers are self-regulated through the existing network of independent certification bodies;
2. Establishing a mandatory regulatory system implemented through third party service delivery in conjunction with the private sector and provincial governments; and
3. Establishing a mandatory regulatory system with full delivery by the Government of Canada whereby the CFIA would take on all activities including certification, licensing, audit and inspection.

Costs and benefits were modelled in detail over a 10-year period with a calculation for long term effects. The study found that the status quo (option 1), if maintained, would result in a cumulative loss of $490.2 million (in 2005 dollars) from the Canadian economy. This would occur primarily due to the loss of the European Union market and reduced revenues as producers and exporters sell what would be an oversupply of organic products in Canada. Canadian consumers would benefit under this option as oversupply would cause prices to fall. Overall, this option has a negative impact on the economy in that for every $1 of costs there is only $0.53 of benefits.

Mandatory regulation with third party delivery system (option 2) and the government full delivery system (option 3) both result in improvements to the Canadian economy cumulatively of $1,257.6 million and $1,244 million (in 2005 dollars) respectively when compared to the status quo. This is a result of maintaining export markets, increasing domestic demand and overall growth in the organic industry. Both of these options would provide a positive impact on the economy as every $1 of costs produces $1.25 and $1.24 of benefits respectively.

The study concluded that option 2, a mandatory regulatory system implemented through third party service delivery provides the greatest benefits to the Canadian economy over time.

Impact on Stakeholders - Option 2

The study examined the impact on each key stakeholder group in terms of benefits and costs. For comparison, the following table provides the net present value (benefits minus costs) in 2005 dollars for each group under options 1 and 2.

Source: Cost-Benefit Analysis of the Effects of Federal Regulation for Organic Products, TDV Global Inc, May, 2005

A brief explanation of the impacts on each stakeholder group for option 2 is presented below. Further details for all options are contained in the full report.

Growers and Producers

This option brings benefits to Canadian growers and producers of organic food products due to the implementation of a "Canada Organic" agricultural product legend requirement resulting in an increase in domestic consumer demand. Growers and producers would also benefit by no longer requiring multiple certifications, realizing cost savings. As production increases, farms would also incur additional operational costs.

Processors

Processors would also earn benefits because of increasing domestic consumption. In addition, processors would see cost savings from a reduced need for multiple certifications.

Wholesale Services

Wholesale companies would benefit from wholesale service margins on the increase in domestic consumption of organic products.

Export / Buying Services

Many exporters and buyers also maintain more than one certification, depending on the countries into which they sell and federal regulation would reduce the need for multiple certifications, reducing costs.

Import Services

Imports make up a significant portion of organic food products consumed by Canadians. Increased domestic consumption of organic products would also have a positive impact on importers of organic food products.

Retailers

With the introduction of the "Canada Organic" agricultural product legend requirement, confidence in products marketed as organic would increase and organic products would also gain visibility, resulting in increased Canadian consumption. The retail sector would incur some additional operating costs. No impact on prices was assumed in the study.

Certification Bodies

Revenue increases would be experienced by certification bodies due to additional certification activities. It is assumed that there would be sufficient certification bodies in operation to maintain price competition. Incremental operating costs would be incurred, however it was assumed significant expansion costs would not be required.

Accreditation Bodies

Accreditation Bodies would earn additional revenue as certification bodies increase their activities. Additional operational costs have been estimated in the analysis.

Society/Consumers

Increased consumption of organic products would bring additional environmental benefits to Canadian society. As Canadian organic production expands, more hectares would be required. Domestic organic farming has been assumed to provide an environmental benefit.

Governments

The establishment of this option does require incremental government expenditures. These expenditures would include increases in the personnel of the CFIA, incremental and ongoing expenditures for market access activities and various expenses incurred by provincial governments with respect to their accreditation bodies. The study did not attempt to measure net benefits to governments.

Compliance and Enforcement

The CFIA would verify compliance and enforce these regulations in accordance with its statutory authorities including those found in the Canada Agricultural Products Act. Compliance and enforcement activities would include, inspections of accreditation and certification bodies for compliance with CFIA and regulatory requirements; label reviews; testing of organic products; and responding to consumer complaints via onsite inspections where required.

Contact

Bashir Manji
Canada Organic Office
Canadian Food Inspection Agency,
(613) 221-7154 (telephone),
(613) 221-7294 (facsimile),
bashirm@inspection.gc.ca (electronic mail).