Worthwhile Canadian Initiative

How to make mine operators pay for the mess they make

When an Ontario cemetery operator sells a burial plot, they must side aside 40 percent of the money they receive into a "care and maintenance account". This is a way of solving a grave moral hazard problem: operators might sell plots, and then walk away from their maintenance obligations.

The same kind of moral hazard problem exists in resource extraction industries, and is solved in a not-entirely-dissimilar way.  Operators are typically required to post bonds, or contribute to an "orphan well fund" or a "mine financial security program." If an company walks away from a toxic waste site once operations have ended, the funds from the security program can be used to pay for site clean-up. 

The only problem is that the amounts in these clean-up funds are typically tiny relative to the potential costs of site clean-up. This point has been raised by the Pembina Institute, in their report on How Albertans Could End Up Playing for Oil Site Mine Reclamation. It's been raised in an expert panel report on Environmental and Health Impacts of the Oil Sands Industry, commissioned by the Royal Society of Canada. It has been noted by the Auditor General of Alberta and the BC Auditor General.

The risks associated with future toxic waste from the oil sands are, in some ways, more worrying than the much more widely known global warming ones.  Humans could possibly adapt to a warmer climate. But the arsenic-laced water around the NWT's Giant Mine? That's unequivocally, inevitably lethal. The issue is more pressing than ever this year, given the federal government's decision to approve the Trans Mountain Pipeline, and their announcement that they will be welcoming more foreign investment (if it's hard to stop a Canadian operator from walking away from a toxic waste site, how will it be possible to stop a foreign one?). 

Why hasn't more attention been paid to the environmental risks of resource extraction? My theory is that the human brain is just not very good at processing low-probability, ultra-high-cost events. We can't differentiate, at an emotional level, between someone defecating on our driveway, and someone contaminating the entire Athabaska watershed. We just can't grasp - or don't want to grasp - the enormity of the environmental disaster the oil sands could create.

My contribution to this year's Macleans "chart of the year" competition attempted to convey the environmental risks of the oil sands in a way that made them intelligible to the typical educated and informed Canadian. The chart and the post follows below. The graphics aren't great. Here are the raw numbers: Download Oil sands v tar ponds. I would welcome suggestions for alternative and better ways of presenting this data.

Doug Saunders has written a dreadful column about the "resource curse", and I'm going to explain why it's dreadful

This column by Doug Saunders on the "resource curse" in last Saturday's Globe and Mail is quite dreadful:

When the price of oil is the foundation of your country’s economy, a sudden plunge to half its value focuses the mind wonderfully, doesn’t it?

One's heart sinks at the very first sentence: the premise is wildy at odds with the facts and can lead to nothing useful.

The New Mercantilists

In its search for new revenues, Ontario commissioned a government panel to examine how to wring more money out of government assets.  In recent days, the panel led by TD Bank CEO Ed Clark has revealed several ideas including selling off Hydro One’s distribution business, restructuring Ontario Power Generation so it provides more revenues and modernizing the Liquor Control Board so that it can generate more revenues via internet sales.  Moreover, Ed Clark also suggested that the Beer Store – which is a private monopoly sanctioned by the Ontario government – should also be used to provide more money for the Ontario government.

Flogging a Dead Horse: Research the Progressive Conservatives misinterpreted was flawed

This post was written by Mike Veall of the Department of Economics at McMaster University.

David Reevely and Jim Stanford, followed up by Paul Boothe, Mike Moffat, the Globe and Mail and others have shown that the Ontario Progressive Conservative millions job plan does not follow from the research it is based on. For example, one of their commissioned studies says that a reduction in regulation (Ontario level to Alberta level, however measured) will yield a total of 10,600 jobs. But the PC plan says that will create that many jobs per year, so that over 8 years, that is 8 × 10,600 = 84,800 jobs. They make the same mistake looking at other proposals.

I had been looking at this too but was slow to the draw. One point that I don’t think that has yet been covered is that one of the pieces the PCs misinterpreted, the study by Washington D.C. economist Benjamin Zycher, is not exactly technically watertight itself.  So let’s flog the dead horse. I am grateful to WCI for giving me the space to do so.

Alberta Juggernaut Continues...For Now

Friday’s Labor Force Survey release showed total employment and the unemployment rate were little changed and that there has been little overall employment growth in Canada since August.  Indeed, total employment shrank slightly in Canada with Quebec and British Columbia faring the worst in terms of the total number of jobs lost.  Of course, Alberta was on top –again.

Resource Revenue Retention: New Twists on an Old Idea?

In a post on iPolitics, author and journalist Madelaine Drohan discusses the move by the PQ government in Quebec to embrace the Generations Fund - a sovereign wealth fund created by the Liberal government of Jean Charest in 2006.  The original plan was to invest water power and mining royalties into a fund whose income would be used to pay down the provincial debt.  The fund was apparently valued at 4.3 billion dollars at the end of March 2012 and the recent PQ budget has directed that starting in 2015-16, all mining royalty revenues – about 325 million dollars a year – would go into the fund.  Given the prospect of future mining development in Quebec’s North under the auspices of the Plan Nord, this fund could grow substantially in the future.

My trip to see the oil sands

Last month, the Canadian Association of Petroleum Producers organised a field trip for a group of economics professors to see a couple of the oil sands installations. I once wrote somewhere that the oil sands are the most important Canadian economic fact of our time, and I jumped at the offer to join the tour. I'm glad I did. There are many very good articles out there describing what is going on in northeast Alberta - much better than I could write - but reading those accounts is most emphatically not the same as seeing the installations in person.

Other people who have gone more often and seen more will have longer and better stories to tell. What follows are my impressions of what I saw and learned.

The New Gold Rush

This post was written by HEC-Montréal professor Simon van Norden

With changes to environmental review processes, I get the feeling that the Harper government is keen to speed up development of the Oilsands. That’s not particularly odd. Oil prices tripled and Canada is sitting on the second largest reserves in the world; the Canadian dollar now rises and falls with the price of oil. Development of this resource has the potential to have an important effect on Canadian GDP for many years.

Who benefits from the oil sands? Who benefits from saying that only Alberta does?

This didn't pass my sniff test:

The economic benefits of oil sands development, while considerable, are unevenly distributed across the country, making interprovincial tensions understandable. While provinces other than Alberta are projected to benefit, modelling by the Canadian Energy Research Institute projects that 94 per cent of the GDP impact of oil sands development will occur within Alberta. With so much benefit concentrated in one province, one can hardly call fast-tracking oil sands expansion a nation-building project. Little wonder that the promise of benefits from oil sands development is cold comfort for Ontarians and Quebeckers as the once-dominant manufacturing sector struggles to reinvent and revitalize itself.

Did you read "94 per cent of the GDP impact of oil sands development will occur in Alberta" and interpret it as "94 per cent of the economic benefits of oil sands development will occur in Alberta"? I'm convinced that that the vast majority of the people who read that passage on the Globe's op-ed page interpreted it that way. And I'm only slightly less convinced that the author meant his readers to interpret it that way. Of course, that would be the wrong interpretation.

For reasons I'll get to later, there seems to be a concerted effort to convince Canadians that almost no-one outside Alberta is seeing any economic benefits from high oil prices. For the most part, these efforts appear to be enjoying some measure of success. But the fact of the matter is that the oil sands have increased incomes across Canada to an extent much greater than that paragraph implies.

When men and women are miles apart....

The Globe and Mail website doesn't cope with data and graphics easily, so I'm reproducing my most recent Economy Lab post, along with data tables that couldn't be included in the G&M piece, here:

"Does Canada have Dutch disease?" is a question without a meaningful answer

The debate about whether or not Canada has "Dutch disease" can never get very far, because there is in fact no clear notion what it is. As far as I'm concerned, the term has by now been stripped of meaning: people are using the definition that is most convenient for their purposes.

So in this post, I'm going to summarise some of the points that have been raised:

Gasoline Prices

Well, the Family Day long weekend is upon us and gasoline prices here in Thunder Bay have spiked up again.  Last week, gasoline in Thunder Bay was about $1.17 a liter and right now it is about $1.30 though prices are a bit lower on the south side of town.  Thunder Bay's prices have been among the highest in the country for some time now. 

Employment growth in Texas

This post was written by Simon van Norden of HEC-Montréal.

In normal times, people could care less about employment growth in Texas. But times are strange enough that our neighbours to the south are suddenly making an issue of it. (It’s even in the New York Times! (1) (2))

Why high gasoline prices are good news for Canada

Or at least, not the unremittingly bad news that they would appear to be from stories like this:

Gas prices 'sucking energy' out of Canadian households: The long upward march in gas prices since late 2010, which has helped keep Canada's resource-based economy chugging, is also equivalent to a 7% hike on the income tax bills of Canadians in 2011, a CIBC World Markets report said Monday.

This will impair consumer consumption growth rates, bad news for Canada’s retail sector, Benjamin Tal, deputy chief economist at the CIBC, said in the report.

"As a share of disposable income, spending on gasoline is now estimated to be less than half a percentage point shy of the peak seen in 2008, and it has already reached that peak when measured relative to total retail sales," Mr. Tal said.

Very grim news, until you start asking yourself "So where is all that money going?" The answer is - to a rough approximation - to Canadians. Moreover, a measurable chunk of the extra money US households are paying for gasoline is also going to Canadians.

What are the policy implications of an under-valued Canadian dollar?

I wrote a post a few months ago on the curiously nonlinear relationship between the Canadian exchange rate and oil prices. Since then, the prices of oil and other commodities have continued to increase, and it is perhaps time to consider the policy implications of the kink at parity.

LED holiday lights and the rebound effect

The holiday light market is now dominated by energy-efficient LEDs. According to BC Hydro:

The big difference is that they use up to 90 per cent less energy than incandescent lights, which means your holiday lighting charges could be as much as 90 per cent less than if you used incandescent lights only.

The charges could be 90 percent less. But will they be?

I'm writing this on March 8th. When I look out the window, I see my neighbour's holiday lights still shining brightly, even though we're closer to Easter than Christmas. Yes, I have a few lights up too.

Fiscal Policy, the Environment, and How Not to Solve Policy Problems

Canada and by extension the Canadian government faces a number of challenges. There are two in particular I find fascinating:

Over-selling soap

The news item dominated the New York Time's "Most Popular" list for weeks: For your dishwasher's sake - go easy on the detergent. According to the authoritative appliance repairman cited by the Times, “Most people use 10 to 15 times the amount of soap they need, and they’re pouring money down the drain."

Wait a sec - if there's one thing that economists agree on, it's that people never knowingly pour money down the drain. So what's going on?

Oil prices in currencies other than the USD

I've received a request to update my irregular series of graphs of movements in oil prices in currencies other than the USD. There's been a certain amount of movement in the oil and forex markets over the past few months, so I'm happy to oblige:

The CAD and the euro have appreciated by about 20% with respect to the USD and the yen since February. And inflation is below target in both Canada and the euro area. So it may not be a coincidence that Willem Buiter's recommendation to the ECB looks a lot like my recommendation to the Bank of Canada.

Oil prices in currencies other than the USD

Once again, we're seeing an increase in USD-denominated oil prices accompanied by a depreciating USD, so it was only a matter of time before someone put 1 and 1 together and got 11:

Crude awakening: It's oil about the US dollar: Some people would have you believe that oil's surge above $60 (U.S.) a barrel is about anticipation of a global economic recovery. Don't be fooled. This isn't about an economy's renaissance, but rather a currency's demise.

Oil's rise has been tracking the U.S. dollar's fall in near lock-step over the past two months...

I guess it's time to update my series of graphs of oil prices in currencies other than the USD:

Oil prices are up in the US - as well as in Canada, Japan and the euro area.