Statistics Canada reported today that inflation collapsed to just 0.4% in April. The Bank of Canada’s core inflation rate, which excludes volatile items, fell to 1.1%.
Continued low inflation does not provide a rationale to raise interest rates. Perhaps for that reason, Canadian monetary hawks have shifted their rationale for higher interest rates.
In 2011, the C. D. Howe Institute released a paper entitled Overnight Moves: The Bank of Canada Should Start to Raise Interest Rates Now. It argued:
If more ‘no-change’ decisions are made by the Bank of Canada regarding its policy interest rate, inflation expectations might begin to slip loose of their 2 percent anchor. . . . A return to seriously above-target inflation can be addressed only with seriously above-normal interest rates. That is a risk worth avoiding. And it can be avoided only by embarking sooner, rather than later, on the process of steadily increasing the overnight rate target.
(Here was my response to this paper at the time.)
After nearly two subsequent years of no-change decisions, inflation remains well below the Bank of Canada’s 2% target. But the C. D. Howe Institute is still advocating higher interest rates.
Earlier this week, it released a paper entitled The Dangers of an Extended Period of Low Interest Rates: Why the Bank of Canada Should Start Raising Them Now. This paper presents a grab bag of alternative rationales to urgently raise interest rates.
Paul Krugman recently noted a parallel shift in the Bank for International Settlements’ ongoing calls to raise interest rates: “Higher interest rates are always the solution; it’s only the problem they’re supposed to solve that changes.”
My op-ed in today’s Saskatoon StarPhoenix (page A11):
Privatizing ISC is a poor deal for Saskatchewan
The provincial government estimates that selling 60 per cent of the Information Services Corporation will raise up to $120 million for infrastructure investment. Is that a good deal for the people of Saskatchewan?
Last year, ISC generated $20 million of profit for the provincial treasury. Losing 60 per cent of this profit, $12 million, every year is a very costly way to get $120 million of one-time cash. That deal would be equivalent to borrowing in perpetuity at an interest rate of 10 per cent.
If the shares of ISC were to fetch less than $120 million, this rate would be even higher. By comparison, the Saskatchewan government could finance infrastructure at an interest rate of three per cent by issuing provincial bonds.
Don McMorris, the minister responsible for privatizing ISC, suggests that corporate taxes change this equation. On April 16, he told the legislative assembly: “The government will retain about 40 per cent of the shares of ISC … not to mention the corporate tax that the other 60 per cent will be paying back into the coffers of the province of Saskatchewan” (Hansard, page 3231).
But most corporate tax is paid to Ottawa rather than to the provincial treasury. The Saskatchewan government is promising to cut the provincial corporate tax rate to 10 per cent, compared to a federal rate of 15 per cent. Read more »
The following is a guest post by Nick Fillmore.
National business journalists and columnists have bought into Prime Minister Stephen Harper’s demeaning view that folks in the Atlantic region are backward and have a defeatist attitude. Framed in contemptuous language, they’re promoting untested economic ideas that, if adopted, would seriously damage the economy – and the people – of the region.
Apparently it wasn’t enough for elite business journalists to applaud how Harper has made life far more difficult for many already struggling seasonal workers by cracking down on employment Insurance (EI). They are advocating the elimination of EI for all 102,000 seasonal workers, including recipients on training programs – people who are employed in the fishery, forestry, agriculture and tourism industries, etc.
“. . . there is no justification, in logic or in economics, for seasonal EI,” wrote Globe and Mail contributor and former Nova Scotia restaurateur Brian Lee Crowley, “and the dogged pursuit of this policy flies in the face of the interests of Canada and people who become trapped in the cycle of working seasonally and then receiving EI benefits while unemployed.” In this era of right-wing ideology, business writers target just about anything that doesn’t fit into their mean-spirited view of what are good economics. Editors fail to question absurd ideas, and it seems to be okay if journalists and pundits are loose and fast with the facts.
Globe and Mail journalist Sean Silcoff, writing about the Atlantic region and EI, is wrong on two counts when he claims to quote the Auditor General as saying “the federal government needs to do more to collect the $300-million or so it overpays in employment insurance every year, much of it to claimants who misrepresented themselves or committed outright fraud.” Wrong. The $300-million is not government money. The EI system is funded by contributions from employers and employees. The government has not contributed to the fund since 1990.
Second, it is incorrect, and harmful to the people of the Atlantic region, to say that “much” of the overpayment went to cheaters. “It is mostly automation induced error, according to my sources”, Canadian Labour Congress economist Angella MacEwen told me in an e-mail. “They say that increased reliance on automation has led to an increase in errors calculating benefit levels and duration. Because of staff cutbacks, most of these errors are only caught when integrity checks are done against tax information from the business/individual.”
Writing in the The Vancouver Sun, Barbara Yaffe, who used to be Globe and Mail correspondent in the Maritimes, also got it wrong: “Last year, according to Human Resources, integrity officers found $128.7 million in fraudulent EI claims. In addition, they identified $330 million in EI overpayments the department is now trying to recoup. That reflects a whole lot of cheating – not a surprise, human nature being what it is.”
Some business journalists are bothered that seasonal workers in the Atlantic provinces pay small amounts into EI but receive considerably more in return when there’s no work.
The Globe and Mail’s John Ibbitson and Darrell Bricker, president of Ipsos Reid Public Affairs, say in their book, The Big Shift, that seasonal workers in Atlantic Canada are economic illiterates because they feel they are entitled to receive more than they pay into the EI fund. Bricker interviewed EI-recipient focus groups in the region, asking them if it was fair that someone in Oakville worked hard and received only a couple of weeks of vacation while paying into the fund, while Atlantic recipients receive larger amounts.
“‘Do you think it’s fair that they are asked to pay for somebody down here who collects every year?’” asked Bricker. “For a few moments, the members of the group would look down at the floor. But invariably, someone would pipe up with something like: ‘That’s what it means to be a Canadian. Those who can afford to pay, pay, and those who need the benefit collect it. That’s the Canadian way.’ Karl Marx couldn’t have put it any better”, they wrote.
“The day will soon come when the Oakville worker downs tools when it comes to supporting P.E.I. fishers. Already rebellion is in the air,” wrote Ibbitson and Bricker. I’m unaware of any likely rebellion of workers concerning sharing EI payments with other workers.
None of the recent articles mention that past governments “stole” $57-billion from the EI account, which was created from contributions by workers and business. The money was put it into general government revenues to help pay down the debt and support other government programs. As of March 2012 – after much government fiddling – the account had a deficit of $7.9 billion.
The business journalism set know very little about rural and seaside life in Atlantic Canada. It is unlikely that any of them – with the possible exception of Yaffe – have even spent any working time in a rural Atlantic setting. None of them offered any suggestions as to what might be done in any of these communities.
The region’s 100,000 seasonal workers support the livelihood of perhaps another 250,000 people and hundreds of large and small businesses – a value of billions of dollars.
Hundreds of communities and businesses would collapse if the EI program for seasonal workers were cancelled and not replaced with a meaningful program. Considering Harper’s attitude toward the region, it is highly unlikely the government would bring in programs to support rural communities.
Those capable of holding skilled jobs – mostly men – would head for other parts of the country. Families would break up. Thousands of people would be forced to live in poverty on welfare, which pays much less than EI.
The social and financial costs to the country would be absolutely huge compared to the EI payments now shared by workers. None of the articles I found suggested any alternative ways of
The bitterness of some journalists concerning this issue is hard to understand.
An angry New Brunswick NDP MP Yvon Godin told an Ottawa forum that, without subsidies, there would be no lobster for anyone in Ontario. In their book, Ibbitson and Bricker, seemingly not caring about the lives of people, wrote that fundamental laws of supply and demand ensure that, even without subsidies, potatoes and lobster are available in Toronto – and perhaps as far away as Winnipeg.
After describing the EI changes in an article, National Post journalist Jesse Kline added: “This is meant to be a kick in the region’s derriere. But it is only a start.”
What motivates these journalists to be so mean-spirited? Maritime academics Karen and Brian Foster believe they have the answer:
“The only reason these writers and pundits and politicians have their knickers in a knot is because of the refusal to sell one’s labour for minimum wage is an affront to their middle-class Tory sensibilities, and therefore a threat to the middle-class Tory privileges around which this moral order is built.”
Business journalism seldom acknowledges the importance of the human condition. In this era of neo-liberalism and its selfish values, journalism is much harsher than at any time in memory. Business writers glamourize the Canadian mining companies that destroy the environment and the lives of poor people around the world. The business pages carry articles by people who support the development of the tar sands and question whether global warming is caused by human endeavour.
Because of this kind of journalism, the powerful men who run our economy are let off the hook and are never confronted with the consequences of their abuses. Personally, I’m in favour of abolishing so-called business journalism. We should hold all journalists to the same moral and ethical standards.
Nick Fillmore is a Toronto journalist and social activist who worked in several capacities with the CBC over 25 years. When he was very young and didn’t know any better, he wrote business profile stories for The Globe and Mail’s Report on Business from the Maritimes.
The real unemployment rate for Canadians over 25 was 8.8% in April. Not great, for sure, but slightly better than it was in 2009.
For youth 15-24, it was up from last April – to 20.9% – so more than 1 in 5 youth are looking for work and can’t find it. In Ontario, it’s closer to 1 in 4, and in PEI it’s 1 in 3.
If we look at the participation rate of youth aged 20 to 24, we see that it’s actually fallen by 2 percentage points since the trough of the recession in July 2009. During the recovery, young people have been leaving the labour force.
The employment rate for the 20 – 24 age group in April 2013 was exactly the same as the employment rate in July 2009, and 4 percentage points lower than in October 2008. That represents a gap of nearly 100,000 jobs.
Considering the growing number of unpaid internships, which the U of T Student’s Union recently pegged as high as 300,000, the labour market is not a friendly place for young workers.
To top off the dismal labour market, our social safety net is failing young workers too. Only 13% of unemployed youth aged 15-24 qualified for EI in 2012. As usual, the coverage is worse for women who are more likely to be found in precarious employment. Only 7% of unemployed young women qualified for EI in 2012.
This morning, Statistics Canada reported an apparently decent month of data for April, with a modest increase in employment, all full-time and all in paid positions rather than self-employment. Despite this seemingly good news, the total number of Canadians participating in the labour force edged down.
As a result, the participation rate declined to 66.5 per cent in April, matching February 2012 as the lowest participation rate recorded since April 2002. In other words, fewer than two-thirds of Canadians over the age of 15 are now employed or looking for work.
While official unemployment has remained at 1.4 million, the number of Canadians not counted as being in the labour force keeps increasing as our working-age population grows faster than employment and unemployment.
One would expect the participation rate to decline over time as more Canadians retire. However, April’s figures reflect a drop in labour-force participation among those below the age of 25 rather than long-term population ageing.
St. John’s in Newfoundland had the highest child poverty rate of all Canadian cities (15.8% or one in every 6 children). Vancouver saw the second-highest child poverty at 13.8%. Kitchener-Cambridge-Waterloo and Hamilton (both in Ontario) had the lowest urban child poverty rate in the country, lower than Canada’s non-urban child poverty average of 5.1%.
Statistics Canada reports on child poverty rates in selected municipalities with a total population of at least 100,000 (known to statisticians as census metropolitan areas). The data are updated every summer and can be found in CANSIM table 202-0802.
* Victoria, BC is also included in the Statistics Canada’s census metorpolitan area child poverty statistics, but the 2010 survey sample was deemed too small/unreliable for Statistics Canada to release a separate child poverty estimate for the municipality.
Since I was a graduate student in the last millennium, I’ve been fascinated by the role of the cotton textile industry in recent economic history, beginning with that momentous event still being heard around the world, the First Industrial Revolution. It just caught fire in Bengladesh. There are books about cotton as a staple – a relatively recent and a reasonably good one is Stephen Yaffa’s Cotton: The Biography of a Revolutionary Fiber, published in 2006, which I am belatedly reading. Much of the book is actually about the cotton textile industry but it would be a stretch to see it as a linkage, namely, forward linkage, from cotton. Rather the real “staple” in the sense of a key or dominant commodity, is the cotton textile industry itself, with cotton it’s key backward linkage.
Which brings me to Albert Hirschman, whom I regularly re-read. In his 1977 essay “A generalized linkage approach to development, with special reference to staples” (reprinted in his Essays in Trespassing.) Hirschman writes:
“[I]t is possible to conjecture that the emergence of a new mode of production is more intimately tied to the availability, at the proper time, of a specific economic activity with a strong affinity for that mode than is realized later on when the mode has become ubiquitous and dominant and therefore appears to be and has in fact become independent from the activity. This sort of relationship, where a specific economic activity is, to paraphrase Marx, the midwife of a new mode of production, can probably be shown to have prevailed also between the textile industry and the Industrial Revolution. If our conjecture is correct, then the appearance of a new mode of production is primie evidence that an activity with the special intellectually suspect multiple affinity for the mode must have been around – the new mode could not have made it otherwise.”
This constitutes a powerful rationale for my hunch, and a way to re-tell a story that has been told so many times and researched ad infinitum. Following Hirschman’s insight, focus on a dialetical relationship, a shifting symbiosis, between an emerging mode of industrial capitalism and an emerging industry. Add, as it seems to me, that as the mode forms more fully, it then facilitates the emergence of other industries – the most powerful of linkages, the exemplary case of what some writers have come to call “lateral linkage.”
Hirscham liked to talk about how one thing led to another; it’s almost his motto for economic development or economic history. In this case, one thing leads to many others. The result is a spurt in economic growth, an industrial revolution, a take-off into sustained growth, a break with the past – a discontinuity from which there can be no looking back by Britain and, in due course, by the world.
A quarter century after Hirschman wrote, what he so powerfully suggested waits to be written. We have the title, namely, Cotton Textiles: The Midwife of Industrial Capitalism.
As others have noted, last week’s Ontario budget combined modest social investments in areas requested by the NDP with austerity for overall expenditures. Ontario program spending, already the lowest per capita of any province, will be subject to ongoing cuts relative to inflation.
This paradox on the expenditure side of the ledger reflects a vacuum on the revenue side. The budget’s summary of tax measures (Table 4.1) is essentially a blank slate, particularly if one excludes measures that simply parallel federal changes.
My pre-budget presentation at Queen’s Park emphasized several easy ways to collect modestly more revenue from the corporate sector. But even this low-hanging fruit was apparently beyond the budget’s reach.
It finally did remove the Employer Health Tax exemption from Ontario’s largest corporations, but then boosted the exemption for all other (non-governmental) employers, turning a modest revenue gain into a wash.
Strangely, the most significant potential revenue measure associated with the budget was completely absent from the budget. Ontario’s finance minister sent a letter dated May 1 (the day before the budget) asking the federal finance minister to extend the temporary restriction of certain provincial HST credits for large corporations. Read more »
As I discussed in an earlier post, Niall Ferguson, the Harvard historian and author of numerous bad books about economics, is prone to writing and saying completely ignorant things, making one wonder about the intellectual heft of so-called academic “stars” who populate our institutions of higher learning.
The latest bit of idiocy uttered by Ferguson was heard last week when he was speaking at the Tenth Annual Altegris Conference in Carlsbad, Calif., in front of more than 500 financial advisors and investors. While responding to a question about John Maynard Keynes’ famous philosophy of self-interest versus the economic philosophy of Edmund Burke, who believed there was a social contract among the living as well as the dead, Ferguson asked the audience how many children Keynes had. He explained that Keynes had none because he was a homosexual and married to a ballerina, with whom he likely talked of “poetry” rather than procreated.
Ferguson went on to say it was only logical that Keynes would take this selfish worldview because he was an “effete” member of society. In other words, if you are gay or childless, you cannot care about future generations nor of society. “Keynes was a homosexual and had no intention of having children. We are not dead in the long run… our children are our progeny,” Ferguson remarked. “It is the economic ideals of Keynes that have gotten us into the problems of today.”
Two days later, after Ferguson’s remarks were reported on, he issued an apology, calling his comments “stupid” and contending he was not a homophobe.
Still, it makes you wonder how any serious intellectual or scholar could reduce someone’s economic theories down to whether or not they had children (as it turned out, Keynes’ wife had miscarried at least once) or which gender they might sleep with. For Ferguson, who is deeply ideological, his remarks seem to suggest that when it comes to discussing economics, empirical reality is less important than whether or not you want children or whom you want to bed.
What Ferguson was really saying is that the ideas of Keynes are bankrupt, even though Keynes was greatly responsible for offering up a solution to governments to mitigate the horrendous consequences of the Great Depression, where unemployment reached as high as 25% in Canada and the US. Today, with neo-liberalism economic theories having ruined economies around the world, and with decidedly non-Keynsian austerity measures exacerbating the global recession (including sending the UK economy back into the toilet), any notion that Keynes’ ideas are responsible for the current state of affairs reveals how divorced from reality Ferguson has become.
In the end, Ferguson cares not about the suffering of working people around the world. To him it’s all about preserving the status quo of the richest 1% and the immense wealth and power they have accumulated in the past three decades.
Posted by Armine Yalnizyan under Bank of Canada, Conservative government, economic growth, free markets, free trade, G-20, inflation, interest rates, international trade, macroeconomics, monetary policy, Role of government, stimulus, unemployment.
May 3rd, 2013
1. He’s Number Two: Stephen Poloz was widely acknowledged in economic and political circles as the second-best choice for the top job at the Bank of Canada. So the surprise was not that he was chosen. The surprise was, Why Not Tiff Macklem? Will someone please find out and tell the rest of us?
2. Doctrinaire [or not?] on Inflation Targeting: He thinks it’s “sacrosanct.” Having studied with monetary policy guru David Laidler at the University of Western Ontario, and been part of the Bank of Canada team that brought inflation targeting to a neighbourhood near you, he got the religion all right. Believers are more inclined to see a “rising inflation” problem that isn’t there. The hazard: Pulling the rising-interest-rate trigger too soon and choking off recovery.
But, like his predecessor Mark Carney, he thinks the central bank should continue being “flexible” on inflation targets. Which are “sacrosanct.” It’s a fine and fuzzy line, unknowable in advance – even to Mr. Poloz.
3. Willing to Commit Stimulus: A “stay the course” assurance is appropriate for Day One. The question is: For how long? For whose benefit? There is legitimate debate over what is more important guidance for setting interest rates – grease the wheels of commerce, or help steer away from over-reliance on borrowing? Raising interest rates have equivalently conflicting impacts: Helps savers and reduces pension liabilities, but slows economic expansion and job creation. Up, down or sideways, clear objectives for interest rate setting are helpful. (See the recent “dual mandate” clarity in the U.S. – unemployment has to fall below 6.5 per cent before the central bank stops stimulating the economy).
4. Not Willing to Commit Noise: “Great,” says Finance Minister Jim Flaherty. This may not last. Even Mr. Carney’s cross-talk with the government over pesky issues like “dead money,” soaring household debt and inequality came later in his mandate.
5. Hasn’t Committed Monetary Policy Lately: Mr. Poloz was part of the braintrust at the Bank of Canada that brought in inflation targeting (circa 1990). Since he left in 1994, monetary policy has become significantly more critical to global economic health – and more complicated. Quantitative Easing (QE) helps create inflation expectations in a system that is dogged by business’s ongoing “crisis of confidence,” a result of spluttering aggregate demand around the world. QE has hosed the global economy with a jaw-dropping $8.9-trillion, aimed at getting business to do more business. We’re told it can be “unwound” if it becomes inflationary. How and when, nobody knows for sure.
There’s something to be said for outsider thinking, and it’s true he is just one person in a vast machine of expertise. But Mr. Poloz has a lot of catching up to do. Or does he? Monetary policy isn’t just about what you do. It’s partly about what you say. The governor sets the tone. And the tone has just changed.
6. Trade, Not Aid: The mandate of the Bank of Canada is to stabilize the domestic economy. There are about 2.5 million businesses in Canada. Roughly 20,000 of them have multinational dealings. The Canadian economy relies on Canadians’ purchasing power, which drives 56 per cent of gross domestic product.
The Harper government has focused on trade as the way to save our collective economic bacon, rather than bolstering the domestic economy and consumer-led recovery. The Harper government also prefers trade over aidin international relations. Mr. Poloz’s background emphasizes trade and export-oriented businesses as the primary engine of the economy. Business isn’t the only thing that makes the world go round, but the government’s choice of Mr. Poloz strengthens this powerful message track.
7. Don’t Do Policy. Do Business: The Harper government keeps walking away from international policy initiatives on taxation, climate change,security, global health; the list goes on. Mr. Macklem was well connected to the international policy community through the G20 and Financial Stabilization Board. But Mr. Poloz brings a big Rolodex of powerful international business contacts to the game.
8. Too Much Focus on Business? Maybe. Time will tell. The bigger concern is maintaining an arm’s length from the concerns of the governmentdu jour. Independence and expertise is what’s really sacrosanct in central banking. There is an ocean of know-how at the Bank of Canada. This appointment makes that seem irrelevant. The antipathy to technocrats and expertise is a leitmotif with the Harper government. The concern is that this sidelining of the best and brightest at the central bank (and elsewhere) may trigger a brain-drain that hobbles the public service. Maybe that’s the point.
9. We Don’t Do Optimism, We Don’t Do Pessimism, We Do [Sur?]Realism: Mr. Carney was known for quip, but not spin. He didn’t shy away from naming the challenges facing Canada’s economy. From census cutbacks to silencing our scientists, there is a troubling trend to simply not reference problematic issues. Markets may be just as emotional as they are rational, but message control on thorny economic indicators like jobs, incomes and uneven growth won’t help decision-making.
Good luck Mr. Poloz. You’ve got a tough act to follow, and the role of your life to play. It will define an awful lot of stories along the way.
This piece was first published in the Globe and Mail’s Economy Lab
On April 23, the Fraser Institute released the annual update of their misleading Consumer Tax Index report. The piece is meant to feed the anti-tax sentiment with numbers sprinkled liberally for their shock value instead of providing any meaningful analysis. Here are some of the main flaws with the report’s methodology.
If what follows sounds familiar, it’s because I’m drawing heavily from the analysis I did in 2010 here, here and here. All of these critiques continue to apply to the 2013 report, which is based on the exact same problematic methodology as earlier editions employed.
The Fraser Institute’s report claims that the total tax bill of the average Canadian family now takes up 42.7% of their income and has increased by 1,787% since 1961 (without adjusting for inflation). These are big numbers, but when we look closely at how how they are constructed, it becomes clear that the Fraser Institute doesn’t even come close to measuring the tax bill of what most people would think of as the average or a representative Canadian family.
The Fraser Institute’s definition of the average Canadian tax bill includes all personal and business taxes, import duties and resource royalties (i.e. the rents we charge for natural gas extraction, water use and timber logging) collected by the Canadian government divided by the number of households in the country. This is an easy calculation to make, but unfortunately it does not correspond to what individual families actually pay; it is too broad to be meaningful and takes no account of the distribution of income and taxes between business and families or between individual families at different levels of the income ladder.
A much better, though considerably more calculation-intensive way to get at the Canadian families’ tax bills looks at the taxes families actually paid, using Statistics Canada’s SPSD/M model. My colleague Marc Lee did this in his 2007 report Eroding Tax Fairness. Here’s what he found:
Marc Lee found that the total tax rate for families in the middle of the distribution in 2005 (deciles 4, 5, 6) was around 35% of income, with lower income families paying less and families in the top 1% also paying less as a share of their income, as the figure above shows.
By focusing on the average tax bill per Canadian household (which is different than the ordinary Canadian family’s tax bill), the Fraser Institute report misses out the biggest problem Canada has with its tax system today: the erosion of tax fairness. We’ve seen some fundamental shifts in who pays taxes in this country since the 1990s:
- A shift of the tax bill from business to families (achieved through large reductions of corporate income taxes and a proliferation of business subsidies and tax credits)
- A shift of the tax bill from higher income to middle and modest income families (achieved through personal income tax cuts at the high end and an increased reliance on regressive taxes)
At the same time, overall taxes have actually fallen for all but the lowest-income Canadian families since 2000, as shown in the figure above (and in the Fraser Institute report’s figure 4). Tax revenues have correspondingly fallen as a share of our economy, which is why many services all Canadians rely on are now overextended or scaled back. Canadian families feel squeezed because our tax system is unfair, not because we’re collecting too much overall in taxes.
But back to the Fraser Institute’s Consumer Tax Index report. Here are three main issues with the conclusions they draw:
1. The representative/ordinary Canadian family does not pay for the average (or mean) business taxes levied in the country, not does it pay for the average (or mean) personal taxes. With income distributed so unequally and highly concentrated among the top 1% of Canadians, the average tax bill is a meaningless mathematical construct. For example, research shows that most, if not all, of the business tax bill falls on investors (not workers) and given how unequally distributed shareholder profits and investment earnings are these days, the average has become meaningless — it’s artificially pulled up by those with higher incomes and does not represent the experience of most families. Taking the average (mathematical mean) doesn’t make sense when talking about personal income taxes, which are progressive, with rates that increase with income. For example, both main parties running for government in BC’s May 14 election have proposed a tax increase on incomes over $150,000. This tax increase will only affect the top 2% of British Columbians, while 98% of us will not see our taxes change. Yet, a future year Fraser Institute Consumer Tax Index report will be showing a small increase in the average family’s tax bill with their current methodology.
Statistics Canada’s latest taxfiler data tells us that individuals in the top 1% paid on average 33% of their income in federal and provincial income taxes while the bottom 90% paid an average of 12% of their income. The Fraser Institute’s report estimates that the average family spent 29.1% of their income on taxes, so you see the problem here.
2. Even if we overlook the distributional issues and accept the Fraser Institute’s numbers, knowing that the average family pays a higher percentage of its income in taxes today than the average family paid in 1961 doesn’t answer the question of whether this is too much or too little. We need to take account of what Canadians get for their taxes to make that kind of judgment. The Fraser Institute report, however, completely misses this part of the equation.
Canada’s made much progress since 1961. We established Medicare (starting in Saskatchewan in 1962) and introduced the Canada Pension Plan (CPP) in 1965, boosted education programs for our children, and modernized our infrastructure to name just a few. These things cost money, so of course taxes have increased.
What’s important to note is that the average Canadian family in 2012 got more out of public programs and services than the average family in 1961. And that if we weren’t pooling our resources together in taxes, we’d still have to pay for healthcare, education, infrastructure and provide support to our elders. The only difference is that we’d have to pay privately, as individuals, and those who can’t afford it would have to go without. For most of us, this would mean a lower quality of life, more insecurity and less money in our pockets, not more.
In addition to providing services, a large chunk of government’s tax revenues flow back to Canadians in the form of direct transfers, such as old-age pensions for our elders, EI payments for the unemployed, and child benefits for parents. The Fraser Institute includes government transfers in their calculation of family income, but you won’t find this out in this edition of the report – you need to look up a 2008 Fraser Institute book that is cited in the report to get at their definition of family income (or family cash income, as they call it). Well, I did, and I found that family cash income includes wages and salaries, but also unincorporated non-farm income, interest, dividends, private and government pension payments, old age pension payments, and other transfers from government.
Without getting into a discussion of what percentage of Canadian families receives income from dividends and other investments, and how meaningful averages are when the distribution is so unequal, let’s just note that old age pension payments and other government transfers account for a large share of the average family’s cash income. In 2007, the latest year for with Fraser Institute numbers are available, they estimated that the average family received $2,125 in old age pension and $8,344 in other government transfers, for a total of $10,469 or 16% of their “cash income” of $66,496.
On average, then, almost half of the family’s total tax bill came back to them in the form of direct transfers from government. The other half was used to pay for services like education, healthcare, policing, justice, road construction and repair that Canadian families used and benefited from. This doesn’t seem like such a bad deal, after all. It’s curious that the Institute decided not to publish this part of their calculation since the 2008 edition of the report.
3. Comparing the average Canadian’s tax bill to the costs of shelter, food and clothing is neither here nor there. With economic and social progress, societies move towards spending less of their incomes on basic survival and having surplus value left over for other pursuits like leisure, better education, better health. It’s not surprising that the cost of basics consume a lower share of Canadian family income in 2012 than in 1961, it would be very worrisome if it didn’t given our economic growth since the 1960s. Comparing the taxes we pay to improve our quality of life through better health care, education, environmental protection and infrastructure development to a number that’s bound to go down over time (expenses of shelter, food and clothing) is a gimmick to make the tax bill appear to be larger and growing faster than it actually is.
The main tax issue facing Canada isn’t that average Canadians are paying too much taxes, but that high income Canadians and profitable businesses are paying too little. For more on that and how to fix it, see this recent CCPA tax reform report I co-authored with Marc Lee.
Originally posted on PolicyNote.ca
In his 2007 “Economic Statement,” Jim Flaherty threw down the gauntlet for provincial governments to cut their corporate income tax rates to 10%. Initially, it seemed like he might succeed in stampeding the provinces down to that level.
Alberta and Quebec were already at 10% (although Quebec had announced an increase to 12% in exchange for eliminating its corporate capital tax.) British Columbia and New Brunswick dutifully cut to 10%. Ontario and Saskatchewan announced plans to do so as well.
But the tide seems to have turned. Quebec went ahead with its increase to 12% and Ontario stopped cutting at 11.5%.
In this year’s provincial budgets, British Columbia raised its rate to 11% (with the NDP poised to win its upcoming election promising 12%), New Brunswick restored its rate to 12%, and Saskatchewan “deferred” its announced cuts (staying at 12% for now).
Two weeks ago, I suggested to the finance committee at Queen’s Park that Ontario should at least “round up” its corporate tax rate to match other provinces at 12%. We’ll find out next week if Charles Sousa shares my preference for whole numbers and additional revenue.
After half a decade of jawboning for provincial corporate tax cuts by conservative politicians, Jack Mintz, the C. D. Howe Institute, etc., most provinces seem to have settled out at 12%, which was the average provincial corporate tax rate when this push began in 2007.
Indeed, the only province left at 10% is Alberta. But as was reported yesterday, having the lowest provincial tax rate has not stopped corporations from shifting taxable profits outside the province. Between that and Alberta’s budget deficit, there may be an opportunity to persuade it to join other provinces in maintaining and enforcing a 12% rate.
I had the following op-ed in the Saskatoon StarPhoenix earlier this month:
Cancel Corporate Tax Reduction
In presenting the recent provincial budget, Finance Minister Ken Krawetz admitted that the government could not afford a previously announced plan to cut Saskatchewan’s general corporate tax rate to 10 per cent from 12 per cent – a move that would have cost up to $175 million annually in lost revenue.
Yet he repeated his intention to proceed with the tax cut by 2015, which could blow a hole in next year’s budget. Fortunately, he now has a year to reconsider this expensive and unnecessary tax break. Read more »
Attempts by the Harper Government to set the record straight over recent changes to EI simply gloss over many valid concerns that have been expressed by critics. I share a couple of EI Change Fact-Busters in solidarity with upcoming rallys on EI that will be taking place across Canada this weekend.
Minister Finley states: “No one will have to take a job that puts them in a worse financial position than collecting EI alone.”
Fact: The majority of EI claimants will have to accept 20-30% lower wages, outside their usual profession, after only 6 weeks of job search.
Minister Finley’s statement is only true in the short term, and only strictly in terms of financial well-being. Employment Insurance is about giving workers time to find a good match – this change forces sub-par labour matches.
In the long term, this policy has the potential to lower wages significantly. If a worker accepts a job at 70% of their wage and finds themselves laid off a year later, the new bar for acceptable wages has been lowered substantially.
Say a worker’s original job paid $100 / day. While on EI, they are forced to accept a job that pays $70 / day. The next time that they find themselves in need of EI, they must immediately accept a job at 80% of their wage at their last job, which is now $56 / day. All of this is subject to minimum wage, but with no guarantee of minimum hours.
In terms of wider labour market implications, pushing skilled workers into lower-paid & less skilled jobs does two things.
First, it means that some other unemployed lower skilled worker doesn’t get that job. Given the level of youth unemployment, this is a grave concern.
Second, it means that the skilled worker may be pushed down the waiting list for skilled employment, which will dilute their skills and lower productivity.
Minister Finley states: “seasonal workers will not be prevented from returning to their seasonal jobs when they start up again.”
Fact: There are consequences to leaving employment that is permanent for employment that is seasonal. Let’s examine a few examples from the guide to enforcing Employment Insurance, titled “Digest of Benefit Entitlement Principles”. The Digest deals with basic terms, common issues, various categories of EI claimants, and elaborates on enforcement details.
Section 184.108.40.206 deals with the issue of leaving permanent employment for temporary/seasonal employment. This becomes important, as frequent and occasional claimants will be forced to look outside their usual field of work much earlier in a claim than was the case in the past, and at much lower wages.
The circumstance will likely arise where skilled workers are forced to accept low paid, low skill work that is indeterminate in nature. Eventually the skilled worker will quit this permanent job to return to their higher skill, higher paid regular employment. Should they be laid off from the seasonal work, they risk not qualifying for Employment Insurance.
Specifically: “If the claimant entered into this new employment knowing that it would be temporary, in order to avoid disqualification they must prove that in their situation they had no other reasonable alternative.”
The claimant must have some proof that they expected the new temporary job to provide sufficient hours to support a new claim. If it does not, then they must somehow prove that leaving the permanent job was “the only reasonable alternative”.
Another rule that affects seasonal workers on EI is the definition of refusal of work. Refusing work can mean failing to apply for work that the claimant is aware of, turning down an employment offer, or failing to take advantage of an opportunity. Section 9.2 defines the concept of refusal.
Failing to take advantage of an opportunity (Section 9.2.3) is especially worrying for frequent claimants. Should the claimant indicate to an employer that they are only available for a limited period of time, for example due to pregnancy or expected return to seasonal employment, this constitutes refusal of employment. Other behaviour that may constitute refusal of work include: “Haggling over the employment offered, demanding a salary which is too high or reporting too late for the interview…”
Minister Finley states: “Without question, EI will continue to be there for those who need it, just as it has always been.”
Fact: EI coverage is falling due to changing rules and changing labour market realities. In 1990, 74 per cent of unemployed persons qualified for Unemployment Insurance. In 2012, only 35 per cent of unemployed persons received EI benefits.
Even more alarming is the 5.5 percentage point decline in the rate of eligibility between 2010 and 2011. An increase in temporary employment since the trough of the latest recession means that a growing number of workers are unable to accumulate sufficient hours to requalify for EI when their temporary employment is terminated.
More and more Canadians are finding that E.I. isn’t there when they need it.
The IMF’s latest delivery of the World Economic outlook contains an interesting analysis of the current “non” recovery in terms of a divergence between fiscal and monetary policy, the first between restrictive and procyclical in nature and the second being accommodating and reinforcing a financial expansion. As argued here by the IMF economists who worked on this issue, the “great” divergence then is between a stagnating productive economy punished by austerity and a booming financial economy supported by quantitative easing and real low interest rates ? I’ve read here and there analysis of the divergence by a number of commentators, the latest and most interesting being this column by Gavin Davies in the FT,
and I’m wondering if this is what a “Financialized recovery” looks like.
I’ll be udpdating this post later with data on Canada, in the mean time here are 4 charts taken from the WEO report, basically each graph is illustrates comparative data contrasting the current recession/recovery with average outcomes of the 1975, 1981, 1991 recession recovery. The first charts real GDP growth, the second public expenditure, the third interest rates and the last central bank assets. For Canada I think that CHMC assets should be used as a complement to data on the BOC’s assets.
The data is organized as follows:
Years from global recession on x-axis; indices = 100 in the year before the global recession. Recovery from the Great Recession in red, Average of previous recessions (1975, 1982, 1991) in blue.
Brian Lee Crowley’s latest column shows he’s a glass-half-full kinda guy. We shouldn’t be worried about unemployment because a) it’s old-fashioned, b) Boomers had it worse (and now they’re getting old) c) we’re doing better than the U.S., and d) it’s really only young people and immigrants that are unemployed.
This is a relief.
So I shouldn’t worry that Statistics Canada Labour Force Survey indicates that real average hourly wages have risen by only twenty cents between 2009 and 2012 (an annualized growth rate of 0.3%). Or, that at the same time, real median hourly wages have actually fallen, indicating that any wage growth is limited to a few at the top end.
Crowley cites vague evidence from internet job advertisements to point out that the number of jobs going unfilled are rising fast.
That’s good news for Canada’s 1.3 million job seekers. They had been discouraged by Statistics Canada data released on April 16th , which showed that January 2013 had the fewest job vacancies recorded in the past two years, and the highest number of unemployed Canadians for each job vacancy (6.5 unemployed Canadians for every job vacancy).
And never mind that businesses have told the Bank of Canada that labour shortage concerns are well below pre-recession levels, nearly half of what they were in 2007 / 2008. They are probably just being stoic in the face of such a red-hot labour market.
Canadians should not be concerned that the vast bulk (over 60%) of new employment since the bottom of the recession has been in temporary employment, and many well-trained Canadians find themselves employed in short-term, low paid jobs. Boomers are going to retire (eventually) and then the rest of us will have our pick of sweet, sweet, permanent, full-time, high wage jobs. Really, we will. Unless our employer gets a favourable Labour Market Assessment and can bring in vulnerable workers at lower wages. Nah, that would never happen, it’s just RBC, right?
It’s probably too minor a detail to note that the Canadian labour market is still short over 500,000 jobs, if we consider the increase in the population over the past 5 years. The employment rate (the percentage of the population that is employed) hasn’t budged throughout the recovery. In terms of job creation we’re treading water, but it could be worse; we’re not the U.S.! That should be very comforting to unemployed and underemployed Canadians struggling to make ends meet. Someone else has it worse.
Seriously though, I do agree with Crowley that the unemployment rate is an inadequate indicator of Canada’s labour market health. Times have changed. Canadian workers today work more involuntary part-time, have longer waits between temporary gigs, and often use self-employment to make up the gaps between temporary employment.
A far more accurate measure of unemployment is Statistics Canada’s R8 measure, which takes multiple labour market factors into consideration. By this measure, unemployment was actually 11.2% in March 2013. Red hot labour market, indeed.
On Tuesday, Statistics Canada reported that job vacancies have fallen to the lowest level recorded since it began collecting these figures two years ago.
On Wednesday, the Bank of Canada projected growth of just 1.5% for this year.
On Thursday, Statistics Canada reported that the number of Canadians receiving Employment Insurance (EI) benefits edged down in February. Meanwhile, the Labour Force Survey indicates that unemployment edged up in February and grew much worse in March.
The combination of rising unemployment and falling EI receipts reduced the proportion of unemployed Canadians receiving benefits to 39.7 per cent in February (i.e. 528,940 beneficiaries out of 1,332,600 unemployed workers). This reduction in EI coverage comes on the heels of new EI restrictions that make it harder for jobless Canadians to access benefits.
This morning, Statistics Canada reported flat wholesale trade and low inflation, providing further evidence of a subdued Canadian economy. Federal and provincial governments should avoid austerity policies that impose a further drag on our economy.
Instead, governments should undertake public investments that would boost economic activity and create jobs. With the Bank of Canada keeping interest rates low, now is an opportune time to finance needed public investments at minimum fiscal cost. Unfortunately, the new infrastructure money in last month’s federal budget is concentrated after 2019.
Have a good weekend everyone!
Beating Back the Ghosts: Be Gone Appeals to Reinhart and Rogoff Authority. Welcome the Triumph of Reason.
They’ve haunted me. Incessantly. The ghosts of Reinhart and Rogoff. Their research here, there, everywhere.
Bank of Canada speeches? Yes. Finance Department talking points? Check. House of Commons debates? Yup. Globe editorials? Ditto. Discussions with fellow progressives? Sadly, yes.
Results? Arguments conjured in their name. Reason decapitated. Modern Monetary Theorists (MMT) banished to the netherworld of cranks.
But we told you so. We told you so**:
- Randy Wray, writing a little more than a year ago, called them out, saying: “One hopes that the database they have assembled might provide more detail. We have tried contacting both authors to access the database, but so far with no response“
- Bill Mitchell: pointing to the inconvenient truth of the underlying analysis and its emphasis on external (not domestic) debt. And then the countless exaggerations that followed by the authors and their propagandists.
- Me, in private, countless times running through the arguments to no avail. Authority wins. Fear of trespassing on the sacred convention of balanced budgets wins. Fear of the narrative wins.
For a nice roundup of what I speak, cryptically because I dare not tempt the gods, please check out the following. Hopefully, this will suffice for the exorcism:
** I use we in the royal we sense not to mean me but the (far far far) more prolific MMT writers who I greatly admire.
Regulations guiding the new Social Security Tribunal came into force April 1st, 2013, and are available online at the Canada Gazette. The SST combines the first and second level of client appeals for CPP, OAS, and EI into one tribunal.
HRSDC expects that the changes will result in $25 million in annual savings, due to centralized administration and the magic of electronic technology. Critics point out that cuts to Service Canada staff and confusing changes to Employment Insurance rules (such as the definition of suitable employment) are likely to result in a large number of clients with good cause to appeal. This is not the best time to completely overhaul an entire appeals process.
Sceptics also wonder if the changes in the appeals process, and the predictable increase in the backlog, were designed to discourage claimants from making an appeal in the first place. In the new process, as far as we understand it at this point, claimants must request reconsideration of the decision that they disagree with, file an appeal, justify their appeal if the Tribunal gives them notice that they are considering summary dismissal, request permission to appeal a decision by the SST, make a final appeal, and then one may take their case to the Federal Court system if necessary.
Causing further concern is the fact that appointments to the SST have been one-sided, compared to the balanced tripartite Board of Referees process. For example, a former Conservative MLA is the only Nova Scotian that has been appointed to the SST so far.
The commentary following the regulations in the Gazette assures Canadians that efficiency will not trump the delivery of natural justice. Only time will tell.
Here is my take from today’s Economy Lab in the Globe.
To expand a bit on alternatives, my take is that the neo liberal turn at the end of the 1970s was one possible response to the stagflation crisis, which found mainstream Keynesian economics wanting.
Left Keynesians such as Kalecki had long recognized that full employment capitalism with strong unions could lead to low profits, low growth and inflation, and the argument vis a vis the UK was advanced by Marxists such as Glyn and Sutcliffe.
The answer – as in the Meidner Plan in Sweden and the Alternative Economic Strategy put forward by Benn and the left of the Labour Party in Britain – was to go beyond conventional counter cyclical macro policy and to socialize the investment process, either by creating worker owned investment funds, or by greatly expanding the state role in industry beyond the traditional nationalized sectors. That way, union discipline on wages would effectively raise investment rather than just result in higher profits and increased inequality. Keynes himself had something like that in mind when he spoke of the need to euthanize the rentier.
Of course, the left failed in the 1980s to mount a credible political economic alternative to neo liberalism. And again the response to stagnation today is to demand sacrifice by workers to solve the problems of an economy still dependent upon private investment for profit.
Canada’s economic development model is on a collision course with the urgent need for global climate action. Worldwide, extreme weather events from drought to floods to powerful storms and record-breaking temperatures are making a powerful statement that climate change can no longer be denied.
Hurricane Sandy, which rudely interrupted a US election in which candidates ignored climate change, pushed climate action back onto the US policy agenda. Costs are piling up, with one recent estimate of $1.2 trillion per year in global damages already from climate change and related environmental costs from a carbon-intensive economy.
In short, at some point soon we are going to see a strong global climate treaty. And when that happens, a day of reckoning is coming for Canada’s fossil fuel companies, whose value is tied to carbon assets they will be forced to leave in the ground.
From a scientific perspective, what matters most is the world’s carbon budget –the total amount of CO2 that can “safely” be emitted in coming decades. For an 80% chance of keeping global warming below 2°C, the target for international negotiations, the world’s carbon budget is now approximately 500 billion tonnes (gigatonnes, or Gt) of carbon dioxide.
Canada’s share of that carbon budget would depend on negotiation, but almost certainly falls between 2 and 20 Gt. Canada’s reserves of bitumen, oil, gas and coal, when converted into potential emissions, are substantially larger: proven reserves are equivalent to 91 Gt; and adding probable reserves yields 174 Gt.
So even with a generous carbon budget of 20 Gt, some 78% of Canada’s proven reserves, and 89% of proven-plus-probable reserves, need to remain underground.
This is bad news for carbon-intensive assets, and for Canada’s financial markets. The Toronto Stock Exchange (TSX) is highly weighted towards the fossil fuel sector, with total market capitalization of fossil fuel companies around $400-500 billion. Fossil fuel companies account for about 24% of the total value of the S&P/TSX60 index.
The recent experience of high-tech and housing bubbles should serve as a warning to policy makers. In 2008, the collapse of a housing bubble threatened the global financial system as a whole, and affected a broad segment of society because housing is the most important asset for middle-class households.
Next to home ownership, the right to future income through employer pension plans is the second-most important asset for a wide swath of middle-class households. Registered pension plans cover more than 6 million members in Canada, and the total market value of trusteed pension funds in 2012 was over $1.1 trillion, of which almost one-third was held in stocks.
It is difficult to ascertain the exposure of Canadian pension funds to a carbon bubble. More than half of Canada’s pension system is in the form of employer pension funds (55%), followed by RRSP assets holdings (35%). In the US experience, pension funds own almost one-third of oil company stocks.
Addressing risk is inherent to financial market investment, which routinely must account for risks due to inflation, currency movements, regulatory changes, political turmoil and general economic conditions. However, there has been a general failure to account for climate risk, and a tendency to view any screening for environmental purposes to be detrimental to financial performance.
In fact, the problem is just the opposite: by not accounting for climate risk – and the inevitability of climate action – large amounts of invested capital are vulnerable to the carbon bubble. Carbon stress tests across the financial industry, and in particular for pension funds, are needed to get a better handle on climate risk in Canada.
While pension funds have to generate maximum current return value for existing (and soon-to-be) pensioners, at the same time they are legally obligated to ensure the long-term sustainability of the fund. That is, funds must equally represent the interests of young workers for their eventual retirements.
Fossil fuel divestment has become a hot topic in the US and Canada, with students leading the way by targeting university endowments. Churches, local governments and pension funds are also beginning to wake up to the mismatch between climate change and fossil fuel investments.
Canada badly needs climate leadership to deflate the carbon bubble, including saying no to new fossil fuel infrastructure like pipelines. A coordinated program must accept a carbon budget, shift incentives through carbon pricing, and supply financial markets with alternative investment vehicles like green bonds tied to building the green infrastructure we need.
Together, these moves would comprise a “managed retreat” from fossil fuel investments that ensures Canada’s financial markets are part of the solution.
Armine and I have some comments in today’s Toronto Star article on Temporary Foreign Workers (page B1). Armine has been commenting extensively on this issue and my head talked for a few seconds on last night’s The National. Here is my online Globe and Mail op-ed:
Reining In The Temporary Foreign Worker Program
Reports of RBC outsourcing jobs to temporary foreign workers to replace existing Canadian employees should prompt a broader debate about the massive expansion of the Temporary Foreign Worker Program in recent years. Is this program addressing genuine “labour shortages” or undermining job opportunities and wages in Canada?
The number of temporary foreign workers in Canada has more than doubled since the Harper government took office. The Department of Citizenship and Immigration reports the presence of 338,000 temporary foreign workers at the end of 2012.
This temporary work force is now almost as large as New Brunswick’s entire employed labour force and far exceeds that of Newfoundland and Labrador (not to mention Prince Edward Island.) With remarkably little evidence or public consultation, the Temporary Foreign Worker Program has added the equivalent of a small province to Canada’s labour market. Read more »
The following is based on a talk at the Bring Your Boomers election forum on April 3 at the Rio Theatre in Vancouver, the fourth in a series of intergenerational dialogues from Gen Why Media, and was co-sponsored by the CCPA, Get Your Vote On, LeadNow and Vancity credit union. I was asked to set the stage for a conversation on climate justice between three youth and five politicians seeking office in the coming election.
BC’s 2013 election comes at an important moment in history. Worldwide, extreme weather events from drought to floods to powerful storms and record-breaking temperatures are making a powerful statement that climate change can no longer be denied.
Down under, Australia recently added new colours to its weather maps to accommodate higher temperatures of up to 54C. Arctic sea ice has shrunk dramatically and hit a new record low last summer. The US is entering is third year of a drought that has devastated crops and led to massive wildfires.
Costs are piling up, with one recent estimate of $1.2 trillion per year in global damages already from climate change, and related environmental disasters and impacts from a carbon-intensive economy. These huge costs are often imposed on people who have done the least to contribute to the problem – a fundamental matter of justice.
BC, too, has experienced climate change first hand in the form of wind and hail storms, landslides, floods, and perhaps most notably the devastation caused by the mountain pine beetle because temperatures are no longer cold enough in the winter.
We know that humans are causing climate change by taking carbon in the form of fossil fuels from underground, and releasing it into the atmosphere. Our addiction to fossil fuels is pushing us towards ever more destructive ways of accessing dirty energy, such as bitumen and shale gas.
We subsidize fossil fuel extraction through our tax system, cheap electricity and public infrastructure. And we’re not just an addict; we are a dealer: BC exports twice as much carbon as we combust in province.
But the painful reality is that 80-90% of our known fossil fuel reserves constitute “unburnable carbon” – if we want to prevent catastrophic climate change. On the basis of this math, students in the US, and now in Canada, are leading a new movement calling for divestment from fossil fuel stocks.
The good news is that, starting in 2007, BC took some important first steps on climate action. BC brought in a law requiring greenhouse gas emission reductions – 1/3 by 2020 and 80% by 2050. We introduced North America’s first carbon tax; aimed to reduce and offset emissions in the public sector; provided subsidies for energy efficiency; integrated emissions into official community plans; and, set out a clean energy mandate for BC Hydro.
Between 2007 and 2010 (last year for which we have data) BC’s emissions fell by 4.5%. Much of this may be due to the recession, but BC’s climate policies arguably deserve some of the credit. And there’s no evidence that those policies have caused economic harm.
Unfortunately, new developments threaten to lock us in to a carbon-intensive development path. Enbridge’s proposed Northern Gateway Pipeline to connect Alberta bitumen to Asian markets has sparked protests across the province.
Of note, Alberta’s tar sands are powered in part by BC’s natural gas. The advent of “fracking” has enabled record gas production, but has raised concerns about the impact on water supplies, earthquakes and leakages of methane. Plans to build the Site C dam on the Peace River would provide new power for fracking and mining operations.
BC’s Natural Gas Strategy envisions a doubling or tripling of fracking in the Northeast, to feed a new Liquified Natural Gas export industry. This development would be like putting 20-40 million cars on the roads of the world. And even though most of those emissions would occur outside of BC, it would mean that BC would not be able to meet the targets enshrined in our GHG law.
Here in Vancouver, plans to dramatically expand exports of coal, the dirtiest fossil fuel, from the Port have met local resistance. As have plans from Metro Vancouver to build a new garbage incinerator.
These projects are all connected to climate change, but are also about the inalienable rights of BC’s First Nations, and protection of our natural heritage. They create very few jobs, at a heavy environmental price.
Still, we find it hard to say no because resource extraction has been so successful in making BC a wealthy part of the world, and because fossil fuel companies have disproportionate influence in the corridors of power. Our governments are wedded to a vision of the province and the country as a quarry for foreign interests, from whose favour come revenues to backfill the public service needs of tax cut politics.
BC’s climate actions have also stalled: funding has run out for energy retrofits of BC homes and public institutions; the government has stated it will not continue with annual increases to the carbon tax or expand it to exempted industrial sectors; BC built the widest bridge in the world to ease car traffic, while public transit funding is in crisis; and BC’s claims of carbon neutral government have been exposed as an accounting fiction.
Searching for Climate Leadership
There is still time to return to strong leadership on climate and energy. This is about what kind of economy BC has in the future, and what role BC will play within Canada and on the world stage. But we can’t have it all: we can’t be a climate leader and at the same time make huge investments in new fossil fuel infrastructure.
That’s why this election is so important. CCPA’s Climate Justice Project issued an open letter in February, signed by 66 organizations from a wide range of civil society, calling on all BC political parties re-commit to our provincial GHG law and table actions that get us to our 2020 target. Leading environmental groups have called for a Better Future Fund that increases BC’s carbon tax to build public transit and clean energy solutions. A coalition of labour and environmental groups has called on parties to table a bold Green Jobs plan.
The path to a zero carbon economy is rooted in ensuring renewables power our daily needs, but also dramatic improvements in the efficiency with which we use energy. It is in the development of zero waste policies that dramatically reduce waste generation and GHG emissions in a move to a closed-loop economy. And over the longer term, it is in the development of complete communities, where people live closer to where the work, shop, access public services and play.
A zero carbon BC is do-able, and would create tens of thousands of jobs, and a province where all jobs are green jobs. It is a project with a purpose, one that will occupy a whole generation. What has been lacking so far is the political will to embrace real leadership and a new vision of what BC can be. This election season we need a race to the top among our political parties, and an end to the view that doing the right thing, by tackling climate change, is a political loser.
The headline numbers are bad enough: “employment declined by 55,000 in March, all in full time. The unemployment rate rose 0.2 percentage points to 7.2%.”
The underlying numbers are ugly. The employment decline would have been worse but for a large jump in self-reported self-employment. The number of employees with positions paid by an employer actually fell by 93,100 in March (partially offset by 38,700 more Canadians reporting self-employment).
Official unemployment would have increased even more but for 12,300 Canadians dropping out of the labour force altogether and consequently not being counted as unemployed.
Average wages rose by only 2.1% over the past year, a bit ahead of actual inflation. But workers are just treading water relative to the Bank of Canada’s 2% inflation target.
On Monday, Andrew wrote that we need a Bay Street sunshine list. Today, we got something almost as good: a Fraser Institute sunshine list, courtesy of US tax filings and The Ottawa Citizen’s Glen McGregor.
This piece is a great counterpoint to the Fraser Institute’s recent attack on public-sector salaries. I hope it is printed in the newspaper as well as being posted on The Citizen’s blog.
The defence of the Fraser Institute’s generous salaries is priceless: “His own salary [$184,000], Veldhuis says, is a lot lower than what he would earn in the private sector.” Of course, many public-sector managers could make exactly the same claim, probably with more credibility. (As Andrew noted, exorbitant Bay Street compensation exerts upward pressure on the top echelons of the public sector.)
Last week’s report from BC’s Auditor General dealt a huge blow to the credibility of carbon offsets and claims that BC had achieved a state of “carbon neutral government.” Coverage of the AG’s report was coloured by accusations from the Pacific Carbon Trust, the Crown corporation created to buy and sell BC offsets, and “experts” from the offset industry that the AG did not know what he was talking about. Letters from those vested interests were leaked to the media in a proactive attempt to discredit the AG, quash the report, or at least delay its release until after the election. This led to an actual delay in the release of the report, for a day, and it finally came out after the press gallery went ballistic about a cover-up in the making.
The report itself is a black eye on the idea that we can absolve our carbon sins through offsets, echoing concerns expressed about international offset schemes. And it validates concerns raised over the past two years by CCPA’s Ben Parfitt (for example, here and here), independent MLA Bob Simpson, and investigative pieces done by the Vancouver Sun and The Tyee. Those reports all noted that almost all of projects funded by the PCT would have happened anyway, and that most were already in progress with some even completed by the time they got PCT funds. In the industry jargon, these projects were not “additional” and were only justified by creative accounting frameworks.
The so-called “experts” — all of whom have skin in the game and stand to profit from a continuation of the PCT — claimed that the accounting is terribly complicated that the AG just was not qualified to pass judgment. Seriously, if this is really so complex a smart accountant cannot figure it then we are really in trouble. But really the problem is not accounting but the historical timeline of events. And science: it is worth recalling that the problem we are trying to solve here is climate change, which is largely caused by taking carbon from underground (fossil fuels) and putting it into the atmosphere. So the only true offset is take carbon out of the atmosphere and put it back underground. There have been some pilot projects of this, called carbon sequestration, or carbon capture and storage, but it is still early days for this as a technology.
While a real offset regime would require a high bar, in practice the bar has been significantly lowered in order for deals to be made and a market for offsets created. This has led to accounting fictions that imagine, for example, a hypothetical situation where a forest would have otherwise been clearcut. But it is not, so the value of that carbon is monetized and sold to companies or governments to claim carbon neutrality. This was the case with Darkwoods, a property purchased in 2008 by the Nature Conservancy of Canada, whose offsets made up 55% of the BC government’s carbon neutrality claim for 2010. Other projects have funded energy efficiency or fuel switching, but in these cases it is hard to prove that these are not “free riders” — companies working the system to their advantage for projects already in the works. At its worst, the PCT has given offset money to oil and gas companies Encana and Spectra, whose business model is delivering the fossil fuels that are causing climate change in the first place.
What many observers have found most egregious about the PCT, however, is that is has amounted to a second carbon tax paid only by the public sector, the proceeds of which only go to the private sector. Money from cash-strapped schools and hospitals that disproportionately benefit the poor has gone to the likes of the Whistler Resort and Spa, and Sun Peaks, who cater to the affluent. Concerns have also been expressed that the PCT has bought its offsets at prices much lower than the $25 per tonne paid by the public sector. Not all the public sector is covered — BC Ferries is exempt as are bus fleets for school boards and public transit — but you get the point.
All of this means the public sector is facing a carbon price of $55 per tonne (including the $30 per tonne carbon tax). But the trick is that there has not been funding to retrofit buildings or convert to renewable energy for a couple years now ($75 million was allocated for such improvements in 2008, but that pool of funding was oversubscribed, and has not been renewed). So one obvious fix would be to use PCT money to fund emission reduction programs in the public sector.
Overall, I would rather see a uniform carbon tax applied to public and private sectors equally, including the 25% of emissions from upstream industrial sources that are not covered by the carbon tax (aluminum, concrete and natural gas leaks/venting). Keep increasing the carbon tax annually, which will improve incentives in the marketplace, and use the carbon tax proceeds to build the low-carbon infrastructure we need, such as public transit and building retrofits, and ensure funds that support forest conservation with carbon management in mind. The PCT experience has taught us a good lesson that effective climate policies should steer clear of offsets and focus on real GHG emission reductions across the economy.
Last week’s publication of the so-called “sunshine” list of 88,412 Ontario public sector workers earning more than $100,000 per year elicited lots of howls of outrage in terms of on line commentary.
It should not be forgotten that the whole point of the annual list – which dates back to the Harris days – is to yank on the chain of public opinion.
High public sector salaries are put forward for detailed scrutiny, with no basis for comparisons to private sector compensation.
While a $100,000 plus income is certainly well above average, it should not be forgotten that more than one in twenty Ontario residents (5.5%) exceed that threshold. It is not unreasonable that school principals, senior public service managers, senior academics and, yes, even skilled trades workers putting in a lot of overtime, should make it into the top 5%.
The great majority of those at the top of the income ladder work in the private sector, and private sector top salaries are generally much higher than in the public sector.
The latest data we have on earnings by detailed occupation are from the 2005 Census. At that time, senior managers in government ($80,790) and in health, education, social and community services ($77,184) earned FAR less per year than the average of $131,808 for all senior managers, rising to as high as an average of $162,376 for senior managers in finance, construction and business services and $160,947 for senior managers in goods production, utilities, transportation and construction.
In my view, top salaries for administrators in the public sector – from CEOs of crown corporations, to university presidents and chief administrators of hospitals, have indeed climbed far too high in relation to average earnings.
But that is mainly because excessive increases have been justified by comparisons to truly excessive private sector norms as borne out by the soaring compensation packages of corporate CEOs.
I for one am going to contain my outrage until we get a Bay Street sunshine list for purposes of comparison.
2013 may be your lucky year!
The details of this year’s PEF student essay contest are now online.
Please note the May 3 deadline and put up this poster to promote the contest.
For the 15th consecutive year, the Progressive Economics Forum (PEF) is sponsoring its own events at the Annual Conference of the Canadian Economics Association (CEA). This year’s Annual Conference of the CEA is taking place at HEC Montréal.
PEF events will take place in the May 31 – June 2 period. All information pertaining to PEF events can be found here.
Below is the summary for our latest Climate Justice Project report, Closing the Loop: Reducing Greenhouse Gas Emissions and Creating Green Jobs through Zero Waste in BC (I recommend checking the much prettier full paper, stand-alone summary, and awesome infographic by Sam Bradd on the website). Closing the Loop was a complex and challenging project that made my head spin, but in the end is one I am really proud of. For me it puts in place a key foundational piece of the Climate Justice Project, and bridges the ecological economics that I had first encountered in grad school two decades ago with all of the nuances of how waste policies have played out in the real world.
To make this happen, I had the good fortune to work with some really amazing co-authors. Ruth Legg came on as a student highly recommended by Bill Rees, and she did a lot of the early legwork on the project by interviewing experts, and developing early drafts. Sue Maxwell, of Ecoinspire, was our zero waste geek, and helped ground our analysis in the BC and local government context. And of course, Bill Rees, whose footprint is all over our conceptual framework. Thanks also to the Pacific Institute for Climate Solutions who provided additional funding for this report.
Summary: Closing the Loop
Most people are familiar with the idea that we need to “reduce, reuse, and recycle” to protect our environment. Over the last few decades, waste management programs have made good progress in diverting solid waste from landfills through recycling and composting. But success has been lacking in reducing the amount of waste that is created in the first place, and in re-using materials (like bottles and packaging) before recycling.
This study aims to address the core problem: a culture of consumption and an economic system that is wasteful and that contributes to climate change. It looks at the possibilities for reducing both solid waste and greenhouse gas emissions while maintaining a high quality of life from the products and services we use.
“Zero waste” policies emphasize upstream, proactive solutions – aggressive materials reduction, re-design, and re-use before recycling and composting. The object is dramatic reductions in the volume of materials that flow through the economy, and therefore energy consumption and greenhouse gas emissions. “Closing the loop” refers to the shift away from a linear economic model – where materials are extracted, made into consumer goods, then trashed – and towards a resource recovery model where materials cycle through the economy.
Well-designed policies can also support local economic development and the creation of new green jobs by increasing domestic capacity to manage and add value to the materials that are recovered.
Landfills, Incineration and Greenhouse Gas Emissions
Carbon dioxide is BC’s single largest waste by weight—more than 49 million tonnes in 2010, compared to 5 million tonnes of solid waste generated ¬– even though carbon pollution goes into the atmosphere not a landfill. From a solid waste management perspective, both landfills and incineration pose challenges due to greenhouse gases.
In the case of landfills, methane, a more potent greenhouse gas than carbon dioxide, is released when organic material does not decompose properly:
• Official estimates of BC landfill emissions are about 4 million tonnes of carbon dioxide equivalent (Mt CO2e) per year. However, recent analysis suggests they are likely to be much higher, around 13-19 Mt.
• More than one-quarter of waste going to landfill is compostable organic material. Composting programs, and initiatives like Metro Vancouver’s plan to ban organics from disposal by 2015, are recognizing and starting to address this problem.
• Landfill gas can be captured in some cases, and used for energy, but this should be viewed as a short-term measure.
Incineration gives the impression of making waste disappear, but it merely transforms solid waste into ash, gases, heavy metals and toxic compounds. While billed as “waste-to-energy” (WTE), incineration, in fact, wastes the embodied energy that was used in making a product – the energy required for resource extraction and processing, product manufacture and transportation.
BC has one major incinerator in Burnaby, a waste-to-energy facility that processes about 280,000 tonnes of waste per year (about 28% of waste disposed in Metro Vancouver). A planned new incineration facility for Metro Vancouver would handle up to 370,000 tonnes of waste per year. This growing reliance on incineration needs to be rethought:
• Incineration produces the greenhouse gases carbon dioxide and nitrous oxide.
• Official estimates of GHG emissions from incineration in BC (84 kt CO2e) are dramatically understated because they do not include emissions from combusting organic materials.
• In terms of GHG emissions, energy generated from incineration is worse than any fossil fuel generation, including coal.
• Incineration often competes with or hinders more progressive solutions like recycling.
Reducing Emissions by Reducing Waste
Clearly, there are major opportunities for diverting waste from landfill and incineration. But far more attention needs to be paid to reducing the amount of waste produced in the first place. Reduction and re-use strategies go beyond recycling by displacing the need for new emissions-intensive manufacturing and transportation.
• Large parts of consumer waste could be transformed by re-use and better product design, from soft drinks to product packaging to food containers to electronic components. Banning single-use containers would also help.
• Requiring extended warranties on durable products and consumer electronics would push manufacturers to provide repair, maintenance and even upgrades.
• Collaborative consumption or sharing has been around for a long time, with public libraries being a good example. Some communities are building on this idea with toy or tool “libraries” that decrease resource consumption while building community.
• Growth of the Internet has also enabled dematerialization – digital music, video, books and magazines are the most obvious examples – a pure reduction in materials while allowing essentially the same consumption.
Building a Resource Recovery Economy
For economies like BC, “closing the loop” is no small task. BC’s resource-based economic model has been subsidized by government through tax credits, low royalty rates, cheap electricity and publicly-funded infrastructure. In addition, policies have allowed many of the costs of production to be externalized: for example, costs like pollution and climate change are borne by people in general and by the environment, not by the specific producer or consumer.
Many of the materials collected from BC recycling programs are not processed locally, but are sold to other countries.
Closing the loop requires changes in economic incentives to capture externalized costs like pollution and develop robust local markets for resource recovery:
• Shift away from encouraging the extraction of raw resources and toward supporting the use of recycled materials and fostering local manufacturing.
• Drive market demand for recycling by addressing key barriers such as a lack of domestic capacity in areas such as carpet, non-refundable glass, and paper.
• Disposal bans or increasing tipping fees for disposal in landfills or incinerators would help drive incentives for recycling.
• Ensure demand for recycled materials through public procurement policies and requirements for minimum amounts of recycled content.
• Encourage the diffusion of business models based on renting and leasing, rather than owning.
• Support cooperative economies and collaborative consumption approaches.
The overall framework for managing how material flows through the economy may eventually resemble supply management systems like those that currently exist in agriculture, and could be supported by public investments or a Crown corporation if necessary.
Making collection easy for households and businesses should be a priority. Extended producer responsibility (EPR, also known as “stewardship” or “take back”) programs put the onus on producers for post-consumer recycling of materials. New requirements for EPR programs should also encourage reductions in waste generated by:
• Including targets for recovery, consumer awareness and access, and goals for reducing, re-using and repair;
• Requiring better labelling for products;
• Establishing deposit and return systems for some products;
• Guarding against contamination that makes materials less valuable and can result in higher residual wastes (most waste experts caution against cheaper “single stream” collection efforts for this reason).
• Tailoring collection systems (curbside pickup, on-street bins, retail return points, or designated depots) to meet the particular circumstances of the product and the regional district or municipality.
Developing a Green Jobs Agenda
Managing waste for resource recovery has the potential to create green jobs in BC in sophisticated collection and sorting systems, and to redirect recovered material from export markets towards domestic re-use, re-manufacturing and recycling activities.
Based on research carried out in the US, UK and Europe, we estimate that there would be about 12,300 direct jobs from 100% recycling of BC’s waste, with all sourcing and processing done locally. With an existing provincial diversion rate of 43%, this would mean about 7,000 new direct jobs. In addition to these, there are also potential jobs gains in the more labour-intensive repair and refurbishment of products.
Because there may be job losses from reduced resource extraction and landfilling and incineration practices, “just transition” programs will be needed that facilitate new skills development. On balance, it is anticipated that job creation impacts would be larger than losses, but policy should actively seek to create those jobs by developing the sectors cited above. Promoting and supporting unionized workforces would push green jobs to ensure decent wages and working conditions.
Beyond Recycling: Next Steps for BC
We consider both reductions in generation (reducing) as well as increases in diversion rates (recycling and composting) in order to model scenarios for 2020 and 2040. We assume a commitment by governments to implement new programs, standards and regulations, most of which are in place by 2020, but longer-term changes in product design and robust substitutes for existing products take longer to phase in, as well as to establish new norms for society’s behaviour around conserving materials.
• We estimate a 13% reduction in waste generation by 2020, and a 45% reduction by 2040 – a major shift toward decreasing materials and energy throughput in the economy.
• Changes in materials, and source-separated collection systems, push the economy close to 100% recycling of materials by 2040.
• By 2020, reduced generation and more aggressive recycling and composting lead to 4.9 million tonnes CO2e savings by displacing organics from disposal and reducing the need for energy-intensive extraction and processing activities.
• By 2040 this rises to 6.2 million tonnes.
Integrate GHG emissions into waste management planning – BC should establish formal targets for reductions in waste generation as well as increased diversion, and these plans should fully account for GHG implications in concert with climate action. The province should require that regional districts re-draft solid waste management plans in line with zero waste objectives.
Do not expand incineration (waste-to-energy) capacity – Incineration has adverse consequences for health and GHG emissions, and requires a steady stream of waste that is inconsistent with zero waste objectives. Even if energy is produced from incineration, it is uneconomic energy as it destroys useful materials that are costly to replace from virgin sources.
Require province-wide composting – Banning organic materials from landfills is a top priority in terms of GHG emissions, and will take effect in Metro Vancouver as of 2015. Similar requirements should be applied across BC.
Phase out single use products and packaging – BC should implement deposit and return systems in support of re-use mandates (all beverage containers, including milk and soft drinks; food containers and cutlery) and require that stores take back containers and packaging for any product they sell. Other single-use items may need to be phased out, such as junk mail, telephone directories, disposable plates, cutlery and food containers, and plastic bags.
Move cautiously on a new BC framework for packaging and printed paper – Potential moves toward “integrated resource management” that mix more types of waste together, instead of maintaining multiple streams of materials, are problematic. A new framework must also respect municipal government and social enterprise investments and existing labour contracts, push producers up the pollution prevention hierarchy, and be rolled out for the industrial, commercial and institutional sector, as well as the residential one.
Establish minimum recycled content requirements – BC should implement re-use requirements and minimum recycled content requirements for a wide range of products. Public sector procurement should also strongly support keeping material flows in BC rather than exporting.
Invest in capacity to move up value chain – BC will need to make public investments in support of a shift away from landfills and incinerators, and toward waste reduction, re-use, repair and maintenance, and finally, recycling and composting.
Develop a green jobs and just transition framework – Policies are needed to help create well-paid, decent green jobs in the resource recovery sector, including policy to support retraining and job transitions from status quo operations. A sector-wide approach that includes collective bargaining and a commitment to decent wages and working conditions is important to this end.
Support research and innovation aimed at reducing the amount of materials flowing through the economy– Research funding should target resource recovery with an emphasis on efficient design, product durability and service economies that dramatically reduce material throughput. In addition, funds to support pilots and start-ups, innovative business models (such as leasing), re-use centres, dematerialization, and other sharing/cooperative projects would accelerate the transition to lower waste generation.
Ban or tightly regulate materials that are toxic or non-recyclable – Materials flowing through the economy should be safe for human, plant and animal health. The “precautionary principle,” which puts the onus on producers to demonstrate their products are safe, should be the bedrock of materials regulation in the economy.
Shift incentives through pricing and regulation – Ecological fiscal reform should include reforming the royalty regime for resource extraction, which would make recycling more competitive. Fees for disposal to landfill and incineration should be steadily increased.
Following the directions laid out in this paper, the next generation of zero waste policy has great potential to help reduce GHG emissions and create green jobs through “closing the loop” on production in BC. Furthermore, a provincial policy mandate for zero waste creates an important opportunity to develop a localized economy better positioned to weather global changes— climate change, market volatility and resource scarcity—that are gathering on the horizon.
Divestment from fossil fuels is an idea whose time has come. Sparked by Bill McKibben’s Rolling Stone article last summer, “Global Warming’s Terrifying New Math”, divestment campaigns are now up and running on over 300 university campuses in the US, with 4 early victories already notched. Students in Canada have declared tomorrow (March 27) Fossil Fools Day, a national day of action, with many campuses launching divestment campaigns.
This makes for great timing for us to release a new national report, Canada’s Carbon Liabilities: The Implications of Stranded Fossil Fuel Assets for Financial Markets and Pension Funds (summary below). We “do the math” on Canadian fossil fuel reserves, in the context of a global carbon budget of 500 Gt. This builds on the great work of the Carbon Tracker Initiative, who found that too much “unburnable carbon“ – known reserves of fossil fuels that are five times larger than what can “safely” be burned — made for a carbon bubble in the financial markets.
My research partner, Brock Ellis, a student just finishing up his Masters of Public Policy at Simon Fraser University, put together a database of fossil fuel companies in Canada and their fossil fuel reserves. We convert these into potential emissions and apply a price of carbon at $50 and $200 per tonne to estimate a range of their ”carbon liabilities”. Even with our conservative estimates, these carbon liabilities end up being much larger than assets or market capitalization. In a nutshell, their business model is incompatible with the need for a (relatively) stable climate, and this is compounded by having a large share of that in coal and bitumen, the dirtiest of fossil fuels that would most likely take an early hit from new global climate action.
Of particular concern is the impact Canada’s carbon bubble could have on pension funds. After housing, the right to future income through a pension is significant asset for millions of middle-class workers. It is a financial problem if fund managers are systemically ignoring climate risk by holding vast reserves of fossil fuel companies, whose value could plummet. Pension funds — as well as university endowments – need to go through a careful process of evaluating their portfolios for climate risk. We wrap up the paper with some broad recommendations to government for a “managed retreat” from fossil fuel investments.
Summary: Canada’s Carbon Liabilities
Mounting evidence of climate change impacts worldwide will inevitably
lead to a new global consensus on climate action. Based on recent
research, between two-thirds and four-fifths of known fossil fuel
reserves have been deemed to be unburnable carbon — that cannot safely
This is of profound importance to Canada, a nation making fossil fuel
development and expansion the centrepiece of its industrial strategy.
This study looks at the implications of unburnable carbon for the
Canadian fossil fuel industry and in particular for financial markets
and pension funds. We argue that Canada is experiencing a carbon
bubble that must be strategically deflated in the move to a clean
Doing the Math
A carbon budget is the maximum amount of CO2 that can be emitted in
the future, based on scientifically-estimated probabilities of staying
below 2°C of global warming, above which would lead to catastrophic or
“runaway” climate change beyond humanity’s capacity to manage. The
world’s carbon budget is now approximately 500 billion tonnes (Gt) of
carbon dioxide, an amount that would provide an 80% chance at staying
Canada’s share of that global carbon budget would be just under 9 Gt
based on its share of world gdP, and 2.4 Gt based on share of world
population. An internationally negotiated carbon budget for Canada
could go up depending on export arrangements with other countries, or
down if larger historical emissions mean disproportionate reductions
from rich countries. A plausible carbon budget for Canada would almost
certainly fall between 2 and 20 Gt.
Canada’s reserves of fossil fuels are significantly larger than
Canada’s fair share of a global carbon budget:
• Canada’s proven reserves of oil, bitumen, gas and coal are
equivalent to 91 Gt of CO2, or 18% of the global carbon budget.
• Adding in probable reserves boosts this figure to 174 Gt, or 35% of
the global carbon budget.
• A final, more speculative category including all possible reserves
is 1,192 Gt — more than double the world’s carbon budget.
This means that business as usual for the fossil fuel industry is
incompatible with action to address climate change that keeps global
temperature increase to 2°C or less. Even at the high end of a 20 Gt
carbon budget, this would imply that 78% of Canada’s proven reserves,
and 89% of proven-plus-probable reserves, would need to remain
Carbon Liabilities, Stranded Assets
The Toronto Stock Exchange (TSX) is highly weighted towards the fossil
fuel sector. At the end of 2011, the TSX had 405 listed oil and gas
companies with a total market capitalization of over $379 billion.
When coal producers are added this number rises further.
To assess the implications of Canada’s carbon bubble, we developed a
database of 114 fossil fuel companies operating in Canada — 103 listed
on the TSX (assets greater than $70M for oil and gas, and $50M for
coal), and 11 foreign-owned subsidiaries. For each we compiled
financial data on revenue, assets and market capitalization. Then we
added data on fossil fuel reserves (proven and probable), which we
converted into potential CO2 emissions. We develop an estimated range
of their carbon liabilities by applying a carbon price, representing
the estimated damages from emitting a tonne of carbon (known as the
social cost of carbon, or SCC, based on recent literature).
For the Canadian-listed companies:
• Our low estimate considers a $50 per tonne Scc applied only to the
proven reserves category, and amounts to $844 billion in carbon
liabilities — more than two and a half times the market capitalization
and nearly double the assets of those companies.
• Our high estimate of $200 per tonne Scc applied to their
proved-plus-probable reserves yields a figure just under $5.7
trillion, an amount 17 times larger than market capitalization and 13
• For 12 companies in our database included in the S&P/TSX 60 index,
total carbon liabilities are between $0.5 and $3.5 trillion. Even the
low estimate of carbon liabilities exceeds both assets and market
For foreign companies, the estimated carbon liability of their
Canadian fossil fuel reserves is between $0.3 and $1.2 trillion. The
latter amount, incredibly, is larger than the full market
capitalization of foreign companies, and 81% of their assets, even
though market capitalization and assets are based on global
This situation is exacerbated by the predominance of bitumen and coal
in the reserve mix because these particular fuel types are far more
GHG-intensive than other fossil fuel products, and are much more
likely to be regulated earlier under a global climate action
• Bitumen and coal account for more than three-fifths of both the
proved and proved-plus-probable potential emissions in our database.
• If synthetic oil is added, which is crude oil produced from oil
sands bitumen, the proportions jump to more than four-fifths for both
categories of reserves.
An important consideration is that Canada’s oil and gas sector has a
very high degree of foreign ownership.
• Foreign corporations owned 35% of the sector’s $518 billion in
assets in 2010, and received roughly half of the sector’s revenues and
profits in 2010.
• US corporations have been the principal foreign investors, although
their share has declined in recent years from 79% in 2001 to 64% in
2010. Recent takeovers of oil and gas assets by China’s cnooc and
Malaysia’s Pentronas in late 2012 — deals worth $21 billion combined —
have increased the foreign-owned share.
Canada has a unique role in the global economy with regard to fossil
fuels. Some 80% of the world’s oil reserves are held by state-owned
companies; that is, countries who have made public ownership of this
strategic asset a top priority. Of the remaining global oil reserves,
two-thirds are found in Canada, making the country a top destination
for private investments.
As foreign capital flows in, so it may flow out. External drivers such
as international, regional or national rules that shrink Canada’s
export markets for fossil fuels, or successful divestment campaigns in
other jurisdictions could have a spillover effect that could trigger a
withdrawal of capital from Canada. This is an additional source of
instability or external shock that could lead to a bursting carbon
Pension Funds and Climate Risk
The recent experience of high-tech and housing bubbles should serve as
a stern warning to policy makers. In 2008, the collapse of a housing
bubble (in particular, in the United States and Europe) threatened the
global financial system as a whole. The fallout from the housing crash
affected a broad segment of society because housing is the most
important asset for middle-class households.
Next to home ownership, the right to future income through employer
pension plans is the second-most important asset for a wide swath of
middle-class households. Registered pension plans cover more than 6
million members in Canada, and the total market value of trusteed
pension funds in 2012 was over $1.1 trillion, of which almost
one-third was held in stocks.
At a system-wide level, however, it is difficult to ascertain the
exposure of Canadian pension funds and other investment types to the
• More than half of Canada’s pension system is in the form of employer
pension funds (55%), followed by RRSP assets holdings (35%), and the
Canada Quebec Pension Plans (under 10%).
• In the US, pension funds alone owned almost one-third of oil company
stocks in 2011.
• About one-third of the assets of the Canada Pension Plan are
invested in publicly traded equities, representing $13 billion in
Canadian equities and $43 billion in foreign equities, as of the end
Addressing risk is inherent to financial market investment, which
routinely must account for risks due to inflation, currency movements,
regulatory changes, political turmoil and general economic conditions.
However, there has been a general failure to account for climate
risks, and a tendency to view any screening for environmental purposes
to be detrimental to financial performance. Our analysis turns this on
its head: by not accounting for climate risk, large amounts of
invested capital are vulnerable to the carbon bubble.
There is an important inter-generational equity argument built into
the management of pension funds. While pension funds have to generate
maximum current return value for existing (and soon-to-be) pensioners,
at the same time they are legally obligated to ensure the long-term
sustainability of the fund. That is, funds must equally represent the
interests of young workers for their eventual retirements.
Deflating the Carbon Bubble
Pension funds and other institutional investors need to be part of the
solution. Other private savings vehicles, such as RRSPs, and public
investments through the Canada Pension Plan, are also in need of a
“managed retreat” from fossil fuel investments. We recommend the
following to green Canada’s financial markets.
• Establish a National Carbon Budget — In order to do their job
properly, and contribute to achieving a zero-carbon Canada (and
world), financial markets need a clear and credible long-run climate
action commitment that provides investment security and certainty. In
addition to credible emission targets, Canada needs to establish a
national carbon budget to manage its fossil fuel resources for
wind-down. A corollary to this is that the federal government must
acknowledge that a large share of proven and potential reserves is
indeed “unburnable carbon.” These reserves should be effectively taken
out of circulation, leaving only Canada’s fair share of the remaining
global carbon budget.
• Make Market Prices Tell the Truth about Carbon — Shifting the
terrain towards clean or renewable sources of energy from fossil fuels
requires policies that make sure the costs of greenhouse gas emissions
are reflected in market prices. Broad framework policies to level the
playing field for clean energy alternatives and internalize costs
include: carbon pricing; removal of subsidies to fossil fuel
producers; regulations and standards; and public investments.
• Develop Green Bonds — Pension funds and other investors divesting
from fossil fuel companies need an alternative place to put their
money, and one major transitional support could be the development of
a national green bonds program (along with complementary provincial
programs). The long-run investment horizons of pension funds align
nicely with long-term bond issues, and the need to invest in public
infrastructure for climate action. While carbon taxes are an ideal
source for funding climate action it will take time for those revenues
to ramp up with a rising carbon tax. Green bonds can bridge this gap
by essentially borrowing against future carbon tax revenues.
• Public Sector Leadership —The government of Canada should direct the
Canada Pension Plan Investment Board to divest from fossil fuel
companies. If pension plans on behalf of public sector retirees and
employees (or their relevant investment management boards) join this
effort, this would provide a powerful signal to other pension funds.
Outside of pensions, divestment is broadly applicable to other related
investment funds, such as university endowments or investments held by
municipalities and Crown corporations. The federal government should
also make changes to private savings vehicles, such as Registered
Retirement Savings Plans (RRSP) and Tax Free Savings Accounts (TFSA)
by restricting preferential tax treatment to funds or investments that
meet certain green economy criteria.
• Mandate Carbon Stress Tests — Canadian financial markets need a
mandatory system of climate stress tests for new financing commitments
and for outstanding portfolios. Disclosure of climate change
information must be standardized to provide high-quality and
comparable information (ideally, internationally comparable) about
climate change policies and assessment of risks. The federal
government could lead in developing selection criteria to be used in
the screening of investment opportunities, and in requiring ratings
agencies to report on climate risk and the implications of unburnable
carbon in their evaluations. Securities and accounting oversight
bodies should be involved in developing a harmonized Canadian approach
to climate risk.
Our suggested reforms would go a long way to providing the foundation
necessary for taking Canada’s economy towards a cleaner future. A
coherent and credible action plan led by the federal government that
includes action to better regulate financial markets will make it much
easier for investors to account for climate change in their
risk-return assessments. Our hope is that these actions can steadily
reduce the exposure of Canadian pension funds and other investors, and
the Canadian economy as a whole, by deflating the carbon bubble.
Until such time as our governments take decisive action, we should
rightly see an expansion of divestment efforts by civil society groups
— on campuses, within churches, by credit unions, and by other
community-based organizations seeking to influence the investment
choices of major institutions. Such efforts are encouraging — they
signal an early understanding that a managed retreat is preferable to
a financial meltdown.