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

Free-for-all, free for none: Campaign financing in Newfoundland and Labrador

The past year has shaken Newfoundland and Labrador’s political parties significantly. Former Premier Kathy Dunderdale’s resignation prompted the Progressive Conservative Party to begin searching for its new leader; the Liberal Party elected its new leader following a long and expensive campaign; and infighting forced the New Democratic Party to perform a leadership review, scheduled for this May.

Chaos at the top of Newfoundland and Labrador’s three major political parties happened to spark debate about provincial campaign financing rules. In the Liberal leadership race, candidates could accept donations of any amount from individuals, corporations, and unions, had no spending limits, and did not have to disclose the origin of donations made to them. Election rules are similarly scant. There are no donation limits, although there are spending limits: candidates can spend roughly $4.30 per elector in each district.

In a democracy, candidates must convince voters why they are suited to govern and campaigning allows the former to provide the latter with information necessary to make a decision at the ballot box. Winning requires candidates to compete with each other and persuade voters in their direction, whether by connecting with them through advertisements, lawn signs, websites, phone calls, or knocking on doors. Politicians need money to make these connections, though, which is why strong financial support is a primary determinant of candidate success.

Unlimited campaign contributions harm Newfoundland and Labrador’s democracy. They allow candidates to rely on a few large donors for support and, in some instances, permit those donors to fund their own campaigns. In many ways, small groups have more influence over policymakers than do individual voters. Reciprocity, however, is instinctual, and even if it was not, politicians must keep their donors happy if they depend on them for re-election. Moreover, unlimited campaign financing allows affluent candidates to use their personal wealth as an electoral advantage.

The lack of rules governing leadership races is of even bigger concern. In the most recent provincial by-election, candidates were permitted to spend $42,278. This is a large sum of money, but it is not insurmountable for candidates with some of their own money, a respectable donor base, and party support. But the “capital requirement” of a leadership bid is prohibitive for all but the wealthy. In the Liberal Party of Newfoundland and Labrador’s 2013 leadership race, for instance, two candidates spent over $400,000. Much of this came from their own pockets.

Only candidates willing to spend large sums of their own money, or those with donors willing to fund their campaigns, stand a chance to lead one of the province’s main parties, which gives wealthier individuals an advantage or holds leadership accountable to large donors. (Moreover, leadership candidates do not have to disclose their donor lists, exacerbating the situation.) Until the situation ceases, parties will not have an incentive to reduce their own spending or contribution limits to reasonable levels.

The problem is not, strictly speaking, that wealthy people have too much power in politics. Even if corporations, unions, and individuals represented the interests of those without their own wealth to spend on campaigns, their ability to almost singlehandedly fund campaigns makes politicians more accountable to a few voices than to many. Without contribution limits, groups representing people control elections rather than people themselves. This weakens the connections between voters and democracy’s outcomes.

The Government of Newfoundland and Labrador should, therefore, institute a campaign financing regime, similar that of the federal government. It should cap contribution limits, extend its financing laws to leadership elections, and ban corporate and union donations. Taking these steps would make democracy in the province less accountable to money and more accountable to voters.

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


On Helmet Requirements and Similar Laws

Do bicycle helmet laws work? The best answer is that it depends typically on the context of the question. Basic physics, experience, and common sense illustrates that helmets can save the lives of those who are about to sustain an imminent head injury. However, this is emphatically not the correct question to ask when exploring whether to implement such policies. In fact, discerning the correct question can be immensely complicated.

When considering a law that requires adult cyclists to wear helmets, the problem can become difficult to conceptualize, measure, and analyze for a number of reasons.

Recently, a Canadian study published in the British Medical Journal analyzed over 66,000 hospital admissions for cycling-related injuries in Canada since the early 1990s. This study measured changes in head injury rates both before and after helmet law interventions in each province and revealed that helmet laws have no effect.

How could this be?

In an editorial published shortly after the British Medical Journal study, Ben Goldacre speculated on the complexity of this issue, suggesting that people who choose to wear helmets are fundamentally different from those who choose to abstain in the first place. This selection bias could mean that those who wear helmets in the absence of helmet laws are less likely to sustain an injury regardless of whether or not they are wearing protection. Furthermore, Goldacre argues that it is important to consider the effect that helmets have on future behavior. Cyclists may be less cautious while wearing head protection. Not to mention that drivers give less road clearance to cyclists wearing helmets. Both of these effects create a moral hazard that controlled experiments cannot typically capture.

Helmet laws may also reduce the level of cycling, an otherwise healthy activity. This is an unintended consequence due to a dislike for helmets or the financial costs associated with wearing one, however, it is nonetheless difficult to measure in any meaningful sense.

These studies can also have discrepancies. This particular study, for instance, uses emergency room admissions as a measure of injuries, which does not capture information about cyclists who do not get into accidents. Instead, it compares cycling head injuries to other cycling injuries, suggesting that the data is conditional on an accident actually occurring. As Goldacre writes, “analyses … therefore assume that wearing a helmet does not change overall accident risk,” which, of course, it does.

To summarize, even simple questions produce extraordinarily complicated circumstances when expanded beyond a single case study with rigid assumptions. While it is likely perceptive for medical associations and governments to keep cycling helmet recommendations, if not laws, in place, it appears that this stance may not necessarily be evidence-based. Personally, I will continue wearing my helmet when I cycle.

These reservations also offer general lessons for public policy research. Namely, just because a given policy appears beneficial at the individual level does not mean necessarily that it will produce similar results at the aggregate level. Taxation, for instance, is a useful example. Holding the behavior of an individual constant, raising the tax rate will result in this individual paying more taxes. At the macroeconomic level, however, this is not always the case (as is demonstrated by the Laffer Curve). Sometimes, higher taxes persuade businesses to produce less. In this case, tax revenues are lower.

Here, the lesson is that public policy has immediate and long run consequences. In essence, policymakers set expectations about the future, upon which people base their behavior. This behavior, however, sometimes creates unintended, and, often, immeasurable consequences. It is likely, therefore, that this theme holds across a broad range of public policy and lawmakers should exercise caution when attempting to change behavior.

Mike 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