In parallel with the UN Copenhagen climate summit, two reports have emerged which attempt to predict how carbon dioxide emission regulation might affect the Canadian economy. This note provides a brief comparison of these reports, the first published by TD bank economists and the second by the Canada West Foundation.
On October 29, 2009, TD bank economists, Don Drummond and Craig Alexander released a report entitled “Answers to key questions about the costs of combatting climate change”. Their report summarizes the results of a David Suzuki Foundation/Pembina Institute (DSF/Pembina) modeling study that addresses the potential economic impact of reducing carbon dioxide emissions in Canada. The modeling was performed by MK Jaccard and Associates (MKJA) and policy information was provided by DSF/Pembina. Two carbon reduction targets were analyzed; the current Canadian government proposal to reduce CO2 emissions to 20% below 2006 levels by 2020 (this is equal to a 3% reduction from 1990 levels), and a stricter, Kyoto-compliant emission reduction of 25% below 1990 levels by 2020. The modeling indicated that these emission reductions could be achieved and Canada’s economy would still grow between 23% and 25% over the 10 yr. period. It also suggests that climate change legislation would result in improvements to public transit, upgrades to the electricity transmission grid to better incorporate renewable energy systems, refunds to homeowners and manufacturing to offset higher energy costs, investment in domestic agriculture, lower income taxes and improved job creation over the existing policy environment. However, the forecasts also indicated that Alberta would be more adversely affected than the rest of Canada. Nevertheless, Alberta would still lead all Canadian provinces with GDP growth between 38% and 45% between 2010 and 2020 - even with Kyoto style reductions. In context, Alberta’s overheated economy only grew 43% between 1999 and 2009. While not endorsing the report, or any particular set of emission cuts the TD economists declare the MKJA analysis “appears to be robust”.
On December 10, Dr. Roger Gibbins of the Canada West Foundation released a critique of the DSF/Pembina report titled “Sharing the Load - Addressing the Regional Economic Effects of Canadian Climate Policy”. While Dr. Gibbins expressed concern with some of the assumptions used in the MKJA modeling, he provided no additional economic projections and all of his policy criticism is based entirely on the MKJA results. His primary argument is that the DSF/Pembina report “identifies and likely underestimates very substantial negative economic consequences for western Canada, and for Alberta and Saskatchewan in particular”. Based on this assessment, he argues that regional differences must be accommodated in Canada’s climate policy and “If we fail to do so, climate policies will not be effective, their economic impact will be exacerbated unnecessarily and the political union in Canada will be badly strained”.
To support his claims, Dr. Gibbons uses the MKJA model predictions to demonstrate that the government of Canada emission targets would result in Alberta losing $11.6 billion (from $113.4 to 101.8 billion) in investment income in 2020. On the other hand, investment in Ontario would increase from $175 billion to $184 billion. For comparison, the total capital investment for Canada in the year 2020 is projected to be $510 billion, but somehow Dr. Gibbons concludes that Alberta with 10% of the population receiving 20% of Canada’s total investment dollars is somehow “the clear loser in capital investment”.
The MKJA results are further used to indicate that Alberta’s GDP would be $296 billion in 2020 if no action is taken to reduce CO2 emissions. If emissions were reduced to the current government target of 20% below 2006 levels, Alberta’s GDP would only be $274 billion - for a loss of 22 billion dollars in that one year alone. For comparison, he indicates that “the loss in Ontario is zero”. Oddly, Dr. Gibbons does not point out that Alberta’s 2020 GDP/capita projections are the highest in Canada and range from $80,000 to $70,000 /person while Ontario’s are 34% to 50% lower at $52,300 person. Over the 10 year period, Ontario’s economic growth ranges between 2.1% and 2.2% GDP growth/yr for the various emission targets, compared to Alberta’s growth which ranges between 4.4% and 5.7%.
Referring again to the 2020 projections, Dr. Gibbons continues, “Pre-tax salaries are expected to fall 6.2% or $4,069 in Alberta, and 1.7% or $811 in Saskatchewan; in Ontario, the fall is predicted to be 0.2% or $132.” However, he does not mention that average Alberta salaries are projected to be $65,890 in the “business as usual” case and $61,821 with government emission targets whereas average salaries in Ontario only range between $57,453 and $57,321. According to the MJKA predictions, Albertans would maintain the highest average salary level in Canada even with Kyoto style emission targets.
The DSF/Pembina study predicts that in the year 2020, $17.2 billion in “carbon revenue” would be collected in Alberta and only $12.3 billion would be returned. Dr. Gibbons concludes that “this is a difference of about $5 billion or a net cost of $1,318 per Albertan in 2020”. By comparison, each person in Ontario only loses $432. Gibbons then equates this to a revenue shifting proposal that “dwarfs the (federal) Equalization and is likely to have all sorts of unintended consequences that could generate tension in the federation ... Over a third of the revenue raised by a carbon tax or a cap and trade system (36%) will be returned to Canadians through reduced personal income taxes. In essence, hit one region hard and then distribute the bounty.”
The DSF/Pembina study recommends that 10% of the carbon tax revenue should be returned to home owners to offset higher household heating and electricity costs. Dr. Gibbons writes that “the revenue extracted disproportionately from Alberta and Saskatchewan will be used to ensure that Canadians in all regions do not face higher home heating costs. This makes no sense with respect to energy conservation, but it does assure Canadians that, as far as home heating and electricity goes, the reduction targets are cost-free.” He further states, “When we look at the combination of revenue raising and revenue distribution, the Pembina/Suzuki approach is to raise revenue disproportionately from Alberta and Saskatchewan and then use the revenue for tax reductions and spending across the country, thereby focusing the pain as much as possible on Alberta and Saskatchewan.” and “What we don’t see is any plan to use revenues for re-investment in the energy sector... It would make more sense to invest in energy research than provide rebates for home heating costs.”
Dr. Gibbons claims it is unfair that all Canadians would benefit from reduced income taxes and home utility rebates while Alberta and Saskatchewan would have to pay the entire cost for the development of Carbon Capture and Sequestration. He states, “It is important to note that the regulated cost of carbon capture and sequestration will not be covered by the carbon tax revenue and Alberta and Saskatchewan will bear virtually the entire bill for this new infrastructure”. Somehow Dr. Gibbons seems to have missed several news headlines over the past few months; “Alberta to spend $495 M in carbon capture pipeline - Ottawa invests $63M” (CBC news Nov 24, 2009) or “Feds, Alberta pledge $779M to carbon-capture project “ (CBC News Oct. 14, 2009). Oddly, he doesn’t seem to have noticed that the federal government has pledged to spend the vast majority of their $1 billon dollar “Clean Energy Fund” funding Alberta’s CCS projects.
The Canada West Foundation report adds no new information on the potential impacts of CO2 emission regulation on the Canadian economy. It simply disputes some of the assumptions of the DSF/Pembina study without offering concrete alternatives and then proceeds to interpret the MKJA modeling results in a biased and provocative fashion. The report emphasizes every result that can be interpreted as Ontario being unfair to Alberta and it ignores any beneficial data in an attempt to polarize public opinion and cater to an underlying feeling of Alberta’s alienation. Canada West Foundation adds nothing new to the debate except to state that implementation of a carbon trading system would strain the Canadian federation. The author suggests that “Big Oil” is being used as a convenient target for climate change legislation but cautions that “ People will lose their jobs, see the value of their homes go down and be forced to uproot and move.” It then appears to suggest that these possible sacrifices are more important that the potential victims of human-induced climate change. In it’s conclusion, the report states “Either we are all in this together or we are not. If we are not, no matter how much you want to address climate change, the nature of Canadian politics will scuttle the plan.” Unfortunately, it seems clear that unless you agree with the Canada West Foundation position that it will be very difficult to be together.
Finally, the Canada West report appears to confuse differences in potential economic growth with actual financial penalties. Regardless of the carbon policy framework, Alberta would continue to have the fastest growing economy in all of Canada. However, it must also be repeated that the model predictions are only as good as the underlying assumptions. One of these key assumptions is that oil prices will remain constant at $46.48 throughout the ten year period. Unfortunately, the most recent US Department of Energy Outlook report indicates that oil prices will likely be between $100 and $200 per barrel. As we have recently seen, oil prices at this level will likely do more damage to Canada’s and Alberta’s economy (which are the least energy efficient in the developed world) than any of the proposed carbon emission regulations.
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