Energy Transportation and Negative Externalities: The Argument for Sound Regulation

On the heels of my analysis of whether Newfoundland and Labrador has become a “petroprovince,” I examine another aspect of the natural resource development: safety and negative externalities, i.e. environmental costs. In particular, this blog post will focus on the rising usage of large oil tankers for transporting Canadian petroleum products overseas.

Because of Canada’s generous resource endowments, it has become one of the largest oil producing countries and exporters in the world. The proposed Keystone XL pipeline appears to be floundering, however, and the shale gas boom in the United States has withered consumer demand in that country for Canadian exports–both of which have encouraged Canadian producers to look for new markets in emerging economies.

Expanding into overseas markets necessarily requires maritime transportation in the form of transoceanic supertankers, and as demand for energy rises in emerging economies, so too will tanker traffic. Citing devastating spills such as Exxon Valdez, however, several individuals and groups have made an effort to ban or heavily restrict such traffic. Yet, there is a serious economic rationale for continuing to develop, and promote, Canada’s energy sector and the more important issue is developing and promoting it responsibly.

Oil spills have astronomical ecological and economic costs and environmentalists who have concerns about them are justified. In a study published recently by the Fraser Institute, however, the authors note that Canadian tanker traffic has increased by leaps and bounds despite accidents declining sharply, which they argue is the result of better safety practices, smarter regulations, and technological innovation. To reinforce the downward trend in accidents, the most effective regulatory regime is one that requires stringent safety protocols such as corrosion-proof lining for supertankers, in addition to rigorous and frequent inspections to ensure that firms meet these requirements, i.e. a first “line of defense.” Furthermore, establishing safe, well-monitored shipping routes would also reduce accident probability.

Incentives matter and, therefore, policymaking must be independent of private sector interests. (Energy companies have a market-based incentive to avoid losses, which encourages them to take precautions, but many firms fail to pay for their negative externalities.) In addition, regulatory agencies can structure their fine schedules to compensate entirely for the externality costs of environmental damage, which would ensure that firms bear all of the potential costs when making decisions about safety. Canada should also maintain a comprehensive and streamlined oil-spill response strategy that would help contain the damage and repair it, i.e. a second “line of defense.” Lastly, Canadian governments could invest in research and development into containment techniques for “dirty” substances such as diluted bitumen. (Note: most of these precautions exist within the Canadian regulatory structure.)

Some stringent opponents of natural resource development, however, posit that spills are never worth the risk. The nightmarish consequences of many infamous spills haunt the collective memories of coastal communities and environmentalists tend to assume the potential costs to the local economy will outweigh the potential economic benefits. Diluted bitumen, for example, has unknown effects in maritime environments and could prove to be very damaging if it spilled in a maritime setting. Ultimately, those who seriously oppose natural resource development and energy transportation argue that disasters are statistically inevitable and, therefore, not worth risking Canada’s fragile ecosystem and tourist “brand” of having a pristine coastline.

There are several problems with the above link of thinking, however, the most glaring of which is the “inevitability” argument. Indeed, oil spills are inevitable, but so too are all accidents. All economic activities carry some risk, whether they are human, environmental, or financial. Air accidents, for example, have steadily decreased in the last few decades, and although additional accidents are inevitable, it would be unwise to ban air travel. In essence, opponents of natural resource development would like a moratorium on tanker traffic. This approach, however, would stymie efforts within the energy sector to develop safer transportation mechanisms and it could encourage alternative forms of transport that are more dangerous such as rail. Most importantly, it would cripple Canada’s economic prospects and damage our living standards. These caveats show precisely why the apparently calm, well-reasoned rhetoric of the anti-tanker movement is simply a knee-jerk reaction that ignores many constructive solutions to a complex challenge.

Leo Plumer is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in economics and political science at McGill University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Against Smoking Bans in “Public Spaces”

In Canada, the government prohibits smoking in “indoor public spaces,” which, according to the law, consist of bars, restaurants, bowling alleys, etc. The term “indoor public spaces,” however, is misleading: they are public only in the sense that there are other people sharing the space, yet, many of these “indoor public spaces” are owned by private individuals. There are several reasons for protecting their right to choose whether they want a smoke-free or smoke-filled establishment.

Many complain that smoking in bars is encouraging to nonsmokers and exposes them to secondhand smoke. There are many reasons why this argument may not hold. For now, though, it is more important to focus on the demonization of smoking. By categorically prohibiting restaurant owners from allowing their customers to smoke inside, the government prevents people from doing something they may want to do, i.e. to smoke in a bar or own a bar that allows smoking). Smoking is not good or bad “in itself,” but, rather, it is only good or bad according to individual preference, including, but not limited to, the tradeoff of overall health for immediate pleasure, the terms of which some individuals would happily agree with. Moreover, there is an enormous amount of information detailing the economic, health, and social harms associated with smoking available to consumers that allows them to choose intelligently.

A popular argument for banning smoking in indoor public spaces pertains to workers’ rights: smoking indoors threatens employee health and welfare and because many workers do not have the convenience of choosing their place of employment–so the argument goes–allowing it forces them to choose between inhaling toxic cigarette fumes and unemployment.

To some extent, indoor smoking harms workers. Does that really justify banning it?

Closer examination of firm behavior demonstrates that it varies based on the economic implications of “safety.” Between 2008 and 2010, 700 construction workers died from workplace injuries in Canada. In addition, 637 individuals died in manufacturing workplaces and 329 in the transportation industry. Although these numbers may seem surprising, the theory of compensating differentials explains why outcomes in some industries differ from those in others.

According to the compensating wage differentials theory, workers are compensated by firms in a number of ways: these include wages, nonwage benefits, and working conditions. Any given individual has a set of preferences between these forms of compensation. A risk adverse employee, for instance, may be willing to give up much of his paycheck for a little more safety. Someone comfortable with risk, however, could be willing to put herself squarely in danger’s way for better pay. That some individuals are comfortable with more risk explains why construction workers, for instance, agree to work in dangerous settings: higher compensation allays most concerns, whereas lower compensation highlights them. Firms need to offer compensation for labour to attract workers—when they decrease safety, labour supply shrinks and forces the firm to boost wages. Thus, there is a positive correlation between risk and compensation. And there is no authoritatively “ideal” level of risk; instead, there is a multitude of individually preferred ones.

Thus, to attract workers, owners of establishments that allow smoking indoors would need to offer wages high enough to distract employees from the health hazard associated with working there (assuming these concerns are present). For some workers, the increase in pay would offset their health concerns. Similarly, restaurant owners must consider whether indoor smoking discourages consumers from eating at their establishment. If there is growing opposition to smoking, for example, restaurant owners must choose between allowing customers to smoke indoors and losing whatever percentage of their customer base that refuses to eat in an establishment that permits indoor smoking.

Examining both consumer and employee perspectives on smoking indoors lead to a common conclusion: laws dictating firm behavior typically enforce an arbitrary standard and ignore individual preferences. Instead, the government should allow property owners to decide what is best for their respective establishments and let people pursue their individual desires freely.

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