Originally posted on 31 October 2017
Several headlines stood out over the past week, which, provide further context to the governing dilemma facing the New Democratic government. The dilemma is running a state that historically could run deficits seemingly indefinitely and not have to raise taxes. The second piece of the dilemma is the economic transition away from fossil fuel consumption.
What do I mean by running a state that historically could run deficits seemingly indefinitely and not have to raise taxes? The usual definition of a deficit as recorded in the public accounts includes non-renewable resource revenue. My definition, borrowing from Ron Kneebone at the University of Calgary, does not count resource royalties. Why? Because an asset is being sold and in “normal” accounting, such an asset would have a “book value.” Only if the sale price exceeded the book value would the difference be booked as revenue. Why such distinctions are important is that the public accounts treatment has mislead the public about how poorly managed the province’s finances have been for decades.
For New Democrats arriving in office in May 2015, a very rude surprise greeted them. The resource gusher was at an end (unless you believed oil was to rebound back to $100 a barrel). How this situation was presented by senior officials that May will be up to historians to analyze. Was it a “grim reaper” analysis or more panglossian? But I digress.
The articles following and commented upon reflect several dimensions to the governing dilemma. The first two articles are about the plan now put forward by the Canadian Association of Petroleum Producers (CAPP) respecting new rules governing methane gas releases by the industry.
Writing about the same proposal, editors and journalists in two daily newspapers present a very different take on the proposal. The CAPP Methane Proposal includes quotes from Tim McMillan, CAPP’s President and CEO:
- We have a solution that positions Alberta as a global leader on methane emissions reductions, while maintaining a strong economy at home.”
- “The world-class regulatory standards of our province and industry’s innovative technologies help define Canada’s leadership position.”
- “Canada is already leading in front of the United States on methane reductions – and with smart action can protect the environment and jobs for Albertans.”
- “Industry has taken early action since 2012 and continues to improve its environmental performance, while growing the economy.”
- “Any approach to methane reduction will have impacts and won’t be easy but we owe it to our employees and communities to find the most efficient model that will limit the impact on jobs and the economy.”
The Edmonton Journal article entitled “Made-in-Alberta ‘solution’ unveiled to save energy jobs” frames the question in terms of employment. The writer, Juris Graney relies heavily on the text from CAPP and a brief statement from Energy Minister Margaret McCuaig-Boyd, who noted “draft” regulations would be released in the coming days. “McCuaig-Boyd said Alberta’s oil and gas industry’s early action and commitment to working with government ‘means we are well on our way to an Alberta-made plan that puts the jobs of hard-working Albertans and a strong economy front and centre’.”
Contrast this coverage with the Globe’s headline “Environmentalists say CAPP’s methane plan will fall short.” Shawn McCarthy writing from Ottawa noted that “Faced with looming government action, … CAPP said on Monday that it had a methane plan that would cost its member companies $700 million over eight years, and would be more flexible than draft regulations that Ottawa has published.” McCarthy goes on to mention that the timing- when Alberta’s Legislative Assembly resumes its fall sitting,- will allow the opposition parties to quiz the government on its draft regulations.
The CAPP proposal is “risk-based” allowing for more flexibility for companies to concentrate on high-risk facilities permitted more “cost-effective solutions”. The article then shifts to presenting another viewpoint- that of “environmentalists” stationed at the Pembina Institute and the Environmental Defense Fund (EDF). Pembina spokesperson questioned the adequacy of verification methodologies. Drew Nelson of EDF stated that “the biggest players in the industry are looking at this (methane emissions) as an issue of their survival. (emphasis added)”
Tailings Ponds gone by 2043- Precedent ruling or not?
In the past week, the Alberta Energy Regulator approved Suncor’s re-submitted tailings pond plan. Regulator approves Suncor tailings pond plan27-10-17 EJ
The report from the Canadian Press said that “all tailings must be gone by 2043.” The scale of the ponds are unfathomable presently the Millennium pond holds “300 billion litres of water contaminated with toxins including bitumen, naphthenic acids, cyanide and heavy metals.” According to the article, the AER says the ruling is not a precedent. But Pembina analyst Jodi McNeill suggested that, given other ponds have the same issue, this decision is a precedent. See the full AER Decision
National Energy Board forecasts peak consumption
Our next article pertains to the National Energy Board. Demand for fossil fuels will max out in two years, NEB says27-10-17 EJ
THe article states that consumption of fossil fuels will max out in 2019, start to decline slightly and then flatline over the next two decades.”
The NEB in its report Canada’s Energy Future actually says that:
Another key finding in the report is :
Institutional Investors and Climate Change
On 27 October, Jacqueline Nelson, The Globe and Mail Institutional Investment Reporter summarized a “declaration” coming from 30, mainly Quebec-based financial organizations, to encourage companies to change the manner in which they “think about and report their long-term exposure to environmental factors.” The funds signing on to the declaration manage about $1.2 trillion in financial assets and include the vast Caisse de depot et placement, the B.C. Investment Management Corporation and the Public Sector Pension Investment Board.
Several quotes from a vice president at the Caisse may stir up fears in Alberta: “We feel that investors coming out publicly will increase the pressure on those publicly traded companies to take steps to face climate change, ” and “Ultimately the goal is to reach a low-carbon-emitting economy.” The article also goes on to note that the Canadian Securities Administrators, the body representing Canadian provincial securities regulators will be examining the disclosure of risk relating to climate change in March. (Opinion- given the CSA’s track record on eliminating back-end loads and disclosure of mutual fund fees, don’t hold your breath).
And finally, last week Christine Lagarde, the Managing Director of the International Monetary Fund (and arguably the third most powerful women in the world after Janet Yellen and Angela Merkel) delivered an address in Riyadh. According to The Guardian
The world will be in deep trouble if it fails to tackle climate change and inequality, IMF managing director Christine Lagarde has warned. “If we don’t address these issues… we will be moving to a dark future” in 50 years, she told a major economic conference in the Saudi capital Riyadh on Tuesday. Lagarde said that “we will be toasted, roasted and grilled” if the world fails to take “critical decisions” on climate change.
the Perfect Storm
For the Alberta government, it is facing a situation not that dissimilar to the young Syriza government of Alex Tsipris and Finance Minister Yanis Varoufakis in January 2015 when Greece faced a Hobson’s choice of further austerity or default and/or Grexit. (It’s a little more complicated than that of course- read Varoufakis’s detailed account Adults in the Room.)
For Alberta’s boom and bust economy to re-emerge as an engine of growth in Canada requires oil and natural gas prices considerably higher than is the case. The threat of global warming and the necessary transition away from fossil fuels eliminates all fiscal flexibility and the usual fiscal prescription of austerity rears its ugly head. The Alberta government has chosen to borrow to avoid austerity and this policy has its merits and its costs. In the short run, it has likely meant the fall in GDP has been less than austerity would invite. On the other hand, in the longer term, debt will now increase Alberta’s economic and financial problems (as Varoufakis eloquently points out in Greece’s case).
The transition means fewer highly paid, oil patch jobs and ultimately stranded assets in the form of plant, equipment, orphan wells and tailings ponds. No wonder institutional investors and international financial organizations are interested in the costs and risks of climate change. Market capitalization of the petroleum and coal industries are over $1 trillion and Saudi Aramco’s market value may be upwards of $2 trillion. So the stakes are very high for individual and institutional investors who look after enormous pension funds. These funds (not necessarily hedge funds) seek long-term, viable businesses with a limited risk profile. Whether right or wrong, investors are taking a more critical perspective on the fossil fuel industry and this, in itself, will make it more difficult to raise funds at reasonable cost.
A more troubling issue for the province and its taxpayers are the question of the environmental liabilities from the hundreds of thousands of wells, let alone reclamation costs of the tailings ponds. In the very near future, companies will be pressured to disclose more about these environmental liabilities. The position that Alberta’s Securities Commission (ASC) takes during the March meetings of the Canadian Securities Administrators on environmental risk disclosure will be of great interest!