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The Progressive Economics Forum

The OECD and the Tar Sands

The 2008 OECD Survey of Canada incorporates a long and surprisingly critical overview of developments in the energy sector, with a major focus on the tar sands. (Chapter 4). It is, in many respects, far closer to the views of the Pembina Institute and the Parkland Institute in Alberta than to those of the Alberta and federal governments, and even endorses some ideas advanced in last year’s Alternative Federal Budget from the Canadian Centre for Policy Alternatives.

http://www.oecd.org/document/3/0,3343,fr_2649_201185_40732867_1_1_1_1,00.html

It is noted here that the Canadian “oil boom” is mainly a price effect. Real output of the energy sector has, in fact, lagged the economy as a whole, 2003-07, and productivity in the sector has sagged as large new investments have yet to generate significant increases in output.

Echoing Pembina and others, it is noted that conventional oil and gas production have both peaked and are in decline, and that future oil sands output will be severely constrained by rising natural gas prices, limited availability of water, requirements to reduce carbon emissions, and rising development costs.

The positive medium-term impacts of tar sands development on Canadian GDP are expected to be surprisingly small, just an extra 1.1% of GDP in 2020. Almost half of the employment generated from development will be outside of Alberta, and the rest of Canada increase in GDP in 2020 is only marginally greater than the increase in the rest of world (ie. US) share.

That leaves the main economic benefit as a short-lived construction boom. “ Looking forward, the construction boom is not expected to last long. Oil sands investment is being heavily concentrated in a short period of time, and following the peak many workers will be released. It will thus be important to ensure Alberta’s set of policies allows firms to make the most of this market opportunity, mitigates the boom-bust cycle and facilitates adjustment when the construction boom ends. “ (p.107.) As things stand, high quality, long term jobs in Alberta secondary industries are being pushed out of the province. (P. 108.)

The OECD endorses investment of resource rents captured by the provincial government in a Norway like investment fund, to spread the windfall returns over a long period of time and to prevent over-heating and other negative “Dutch disease” effects on the rest of the economy. Their view seems to be that the new royalty regime still leaves significant un-captured rents, though it is an improvement from the very generous current system. (P 124-125.) “It will be necessary to regularly review the (new) royalty regime …. one possibility would be to have a formula whereby parameters are reset in line with key competitor country royalty rate changes.” (P.125.)

The report calls for the elimination of remaining tax subsidies to the oil sector, including the end of the 100% write-off for the intangible costs of development of tar sands mines and special treatment of exploration and development expenses.

Most radically, the OECD questions the wisdom of making provincial resource royalties deductible for federal corporate income tax purposes (p.88.) This undermines the capacity of the rest of Canada to benefit from tar sands developments, and accentuates regional inequalities, especially if Alberta does not impose sufficient royalties. “In particular, insofar as provinces fail to capture pure resource rents via their royalty systems, deductions for royalty payments from the federal corporate income tax should be curtailed.” (P.88.)

Even more importantly, the OECD clearly favours strong action to reduce carbon emissions, and is critical of the federal and Alberta government view that it is sufficient to reduce the emissions intensity of the tar sands. They cite the relative merits of carbon taxes over cap and auction system, but clearly want much stronger federal government action on climate change issues.

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Comments

Comment from Michael Barkusky
Time: June 22, 2008, 2:44 pm

It’s encouraging that there is this much economic insight into this matter at the OECD; but obviously a bit tragic that neither in Ottawa or in Edmonton, is there much (if any) willingness to take the good advice on offer.

It does somewhat re-inforce my view

(a) that the nationalists in Canada who always seem to think that foreigners, in general, just want to take our resources and run, while the Canadian electorate can be relied upon to know its own best interests, are rather prone to oversimplify things;

and

(b) that we desperately need a higher standard of economic literacy in this country so voters can see more clearly how crude, market-fundamentalist and more short-term “political” than anything else, Klein-Harper-Stelmach “economics” really are.

In an increasingly resource-constrained world, more and more densely populated with human beings, externalities are increasingly pervasive, and all economics should really be ecological-economics.

The Europeans understand this better than North Americans for the (tragic but real) reason that they have virtually no wilderness left on their continent. As a result, they value ours more than we seem to value it, ourselves. Smart people learn from the mistakes of others. Not-so-smart people seem to need to repeat the mistakes of their predecessors in order to learn the same lessons.

Comment from Rod Smelser
Time: July 2, 2008, 12:11 am

I am a bit puzzled here. If the fear is that provinces do not extract sufficiently high royalties, then how does making these royalties deductible for the purposes of federal income tax matter? The deductions are in this case assumed to be small.

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