Singing a Different Tune and Embracing the Unknown

Cape Breton Island has a rich culture and fascinating history, matched only by its scenic routes and picturesque landscapes. The Island is highly sought after by vacationers searching for a new spot and golfers looking to play a few rounds at the famous Highland Links Resort. In addition, it is renowned for delicious seafood, hearty people, and, perhaps most importantly, the infamous “East Coast Kitchen Party,” which is an organization that promotes Atlantic Canada’s art scene.

Tourism Nova Scotia and the Government of Canada touts this embellished description of Cape Breton Island, however, it conflicts with a harsher reality: 16 per cent unemployment rate, reliance on government transfers, and a median income well-below the national average–in 2012, $26,160, compared with $31,320 nationally. Furthermore, several rural towns have disappeared, poverty is on the rise, and thousands of Nova Scotians have left the province for a better future.

Fixing these issues requires a momentous shift in the mindset of Nova Scotians and their elected officials. A different approach to natural resource development, for instance, may be the most helpful.

Cape Breton Island, and, in general, Nova Scotia, have a tremendous supply of natural resources, from oil in George’s Bank to natural gas in the Lake Ainslie area, not to mention coal deposits spread throughout the province. There are multiple local groups, however, that have convinced the public that natural resource development is not worth the risk, culminating in the decision to extend the moratorium on hydraulic fracturing indefinitely. Prohibiting all things that carry risk is a dangerous mindset, though. On one hand, residents of Nova Scotia demand jobs, and on the other, shun opportunities that would produce them.

Cape Bretoners must begin to sing a different tune. Industry experts suggest that hydraulic fracturing–colloquially known as “fracking,” could generate nearly $1 billion annually in the province. Former “ghost towns” in Pennsylvania, for instance, have begun booming due to natural gas development in recent years: the unemployment rate in the state is 5.6 per cent, compared with 6.1 per cent nationally, and as a whole, the industry supports roughly 1.7 million jobs in the country. Moreover, natural gas is a much more sustainable and environmentally-friendly alternative to coal and oil. Lastly, the correlation between fracking and earthquakes is weak and instances of pollution occurred due to breaches of government regulation.

Although there are risks associated with fracking, as is the case with any venture, those who are concerned about them exaggerate their scale and probability. Instead of banning the practice, the sensible approach would have been to mitigate the chance of disaster through sound regulation. Furthermore, natural resource development can provide support for local communities. In the United Kingdom, for example, the chemical firm Ineos offered local communities 2 per cent of profits from wells in the area to support hospitals and parks, and 4 per cent of profits to residents who own land near drilling sites. Greenpeace described this practice as a “bribe,” however, it is a common one in the United States that has delivered massive benefits to local communities. A similar approach in Cape Breton Island, and in Nova Scotia, could benefit communities tremendously, and a sound regulatory regime would reduce the risk of environmental damage.

In addition to the picturesque landscapes in the Tourism Nova Scotia commercials, the province should hoist an “Open for Business” sign. At least we could then start to improve the lives of Nova Scotians. In the meantime, however, shunning all, and every, opportunity to create jobs and generate economic growth will reinforce the status quo.

Corey Schruder is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in history at Cape Breton University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Atlantic Canada must make tough energy decisions

Over the course of the past decade, energy issues have become louder and louder in Atlantic Canada; today, energy policy has recently often been the single biggest file for governments in the region. With the Muskrat Falls megaproject, shale gas exploration, and the Energy East pipeline have come a number of decisions Easterners must make—these decisions will play a large part in shaping the region’s economic future.

Let’s first examine the Lower Churchill Project. The project is often simply referred to as “Muskrat Falls,” the waterfall that is being developed for electiricty generation. Muskrat Falls will be owned by Nalcor, which the NL government created in 2007 as a publically-owned electricity-market monopolist. Through its subsidiary NL Hydro, Nalcor has the sole right to supply and sell electricity in the province. And despite the fact that government’s Lower Churchill development plan includes the construction of a Maritime link that connects NL’s electric grid to the mainland’s without passing through Quebec, the NL government has severely restricted interprovincial trade.

By denying Newfoundlanders and Labradorians other electricity options, the province’s government has given Nalcor the power to raise its rates at a whim. This power allows for the construction of the Muskrat Falls project, which will cost $7.7-billion.Without its monopoly, Nalcor would not be able to pay for the project: many economists think the project in uneconomical. In fact, NL’s Public Utilities Board (PUB) could not conclude that the project was the province’s least-cost energy option, stating that there were “gaps in Nalcor’s information and analysis.”

Because of the project’s high costs, the NL government will have to borrow $5-billion—that is, nearly $10,000 for each of its of its residents. With these potential consequences for the both the province’s debt and its electrical rates and output, the NL government’s management of Muskrat Falls will have serious ramifications for the province far into the future.

Muskrat Falls also has ramifications for Nova Scotian energy markets. Emera, Nova Scotia’s publically traded energy corporation will cover 20 per cent of the Maritime link’s cost in exchange for 20 per cent of the electricity produced at Muskrat Falls. Further, Nalcor will be able to use Emera’s transmission rights to sell electricity in the Maritimes and New England.

New Brunswick (NB) faces an equally dramatic energy situation. Two issues dominate energy discussions in the province: hydraulic fracturing (or fracking) and TransCanada’s Energy East pipeline. Tests for shale gas, which NB Premier David Alward hopes will be extracted through fracking, have prompted locals to (often violently) protest. Fiscally, however, potential fracking revenues seem to be the NB government’s only way to pay for its current level of services without raising taxes or adding to the provincial debt, which is approaching $12-billion.

Although New Brunswick’s fracking debate has been Atlantic Canada’s loudest, shale-gas extraction proposals have also provoked argument in NL and Nova Scotia. Recently, the NL government imposed a moratorium on fracking until it has consulted the public and conducted reviews. Nova Scotia has had a fracking moratorium for about two years, though it is set to expire this summer.

New Brunswick can also expect to benefit from the construction of the Energy East pipeline, which will bring Albertan oil to Saint John’s Irving Oil refinery. The most noticeable gains from project will take place during its development and construction: a report by Deloitte found that the pipeline will boost New Brunswick’s GDP by $1.1-billion in this period. And during its 40-year operations phase, the pipeline project will add $1.6-billion to the province’s economy, though it will only directly create 121 permanent jobs.

With Muskrat Falls, NL is taking a significant fiscal risk and trapping consumers with the hope of becoming an energy power. Any jurisdiction that allows fracking must balance the benefits of increased economic activity and royalties with potential environmental harm and local frustrations. And the Energy East pipeline could give NB the sort of economic and fiscal boost it needs. Energy may enrich Atlantic Canada, but squandering it may breed regret.

Michael Sullivan is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Debating Revenue-neutral Carbon Taxes

During the 2008 federal election, proposals to implement a federal carbon tax were a major point of contention. Although Canadian voters ultimately rejected the plan, the issue of carbon pricing remains at the forefront of environmental discourse. This is for good reason: climate scientists, having shown conclusively that the earth is warming, now mostly concern themselves with both the size of the effect, in addition to its primary determinants.

In 2007, the Province of British Columbia (BC) successfully implemented a carbon tax with an important feature: revenue neutrality. The government expected to generate nearly $5 billion annually via carbon taxation and, accordingly, it would reduce personal and corporate taxes by an equal amount. This, in effect, slays one substantial criticism of a carbon tax, which is that it amounts to an additional overall tax burden on individuals, families, and firms. In British Columbia, the policy managed to deter purchases of gasoline and other carbon-intensive products by nearly 10 per cent relative to the rest of Canada, without burdening British Columbians with additional taxes.

Granted, those statistics only measure the carbon that British Columbians purchase in BC. They do not consider the stories of weekend lineups at American border towns where Canadians buy cheaper gas now that the price difference is large. This phenomenon may certainly account for some of the change, but it is quite difficult to imagine this effect being substantial. How much gas must a Vancouverite purchase to justify the two-hour drive, plus the wait in line?

Carbon pricing is also part of the discussion in Atlantic Canada.

In a series of papers published in 2009, University of New Brunswick economist Joe Rugger analyzes the environmental and taxation implications of a BC-styled revenue-neutral carbon tax in New Brunswick. The study found that a tax equivalent of 7 cents per liter on gasoline, applied to all forms of fossil fuel, would reduce carbon emissions in the province by roughly 7.5 per cent. This would occur primarily through higher electricity and heating bills, in addition to consumer purchases of gasoline and oil.

Changing carbon consumption occurs because of two opposing forces. First, making gasoline more expensive creates a “price effect” that causes people to shift their consumption away from gas and towards other things. This is what people refer to when they talk about nudging consumer behavior in a direction hoped to be socially beneficial. The second effect is due to the decreased tax burden–the “wealth effect.” Here, income goes up because of a smaller tax burden. People will then tend to consume, on average, slightly more of everything, including carbon. This works in the opposite direction of the price effect. In the case of BC, it became clear that the price effect was larger than the income effect and, therefore, total consumption was less than it would have otherwise been.

This highlights a confusing irony of carbon pricing policy–anything that makes people richer will tend to mean that they consume more carbon. People should continue to prosper; however, the primary objective is reducing carbon consumption. There are also distributional effects that occur based on the form and target of the tax cuts, as well as consumption behavior. This will be the topic of a second blog post.

In sum, Canadians are becoming more environmentally conscious and they recognize the need for not only fiscal, but also ecological, prudence. In this light, carbon-pricing policies are likely to remain in public discourse. By pairing the carbon tax with associated general tax cuts, rendering it revenue neutral, British Columbia’s experiment shows that it is at least possible to deter carbon consumption, while also minimizing harmful economic effects.

With the upcoming New Brunswick election in the fall of 2014, I would not be surprised if this issue arrives on the campaign trail. Considering recent curiosity in New Brunswick about local shale gas development, this policy has the potential to become quite the wedge issue.

Michael Craig is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute