Since January of this year, over $84 billion worth of investment projects were abandoned in the oil and gas sector in Canada. This is more than a third (36%) of the value of the investments of all companies in Canada in 2016. It is also 20 times the value of public investment in the construction of the new Champlain Bridge, estimated at $4.2 billion. In short, this is a colossal loss. And these energy investments would have required zero public debt! At the same time, announcements of new projects starting in the United States are piling up.
Why is there a substantial shift of investment leaving Canada for the United States? Can it be the fault of the price of hydrocarbons, which is currently low?
In fact, this price is low in the United States too, but it doesn’t prevent the oil and gas sector from flourishing much more than here. There must be other explanations of this phenomenon, which affects government revenues and the incomes of many people, and threatens to reduce economic growth and the standard of living of Canadians for years to come.
In the United States, Canada’s main client and also its main competitor in terms of hydrocarbons, President Trump has launched a campaign of wholesale deregulation, including in the oil and gas sector. During this time, in Canada, the rules of the game are being modified so as to make the assessment and approval process for projects in this sector increasingly long, complex, costly, and uncertain.
Up until now, Canada has benefited from one advantage relative to the United States, namely our corporate income tax rates being lower than they are south of the border. But Donald Trump has just announced his intention to lower the statutory federal rate from 35% to 20%, pushing American rates below Canada’s once state and provincial rates are factored in.
Time is of the essence, and Canada must not let its competitive situation deteriorate further relative to that of its neighbours. The problem must be attacked from every angle if we want to ensure continued wealth creation, which is to say the pursuit of productive, value-added activities that respond to the real needs of consumers, here and elsewhere.
What to do? First, reduce the corporate tax burden, which would benefit not only the oil and gas sector, but the entire Canadian economy. We could simply move to a proportional federal corporate income tax rate of 10.5% (it is currently 15% for large companies and 10.5% for small ones). Second, the regulatory burden also needs to be reduced. A permanent federal body empowered and mandated to do so could help ensure light, efficient regulation.
Third, the federal and provincial governments should agree upon maximum durations for project assessments, leading to rapid and clear answers. Fourth, the notion of social licence must be delimited by restricting consultations to the communities directly affected. Fifth, the rule of law must be guaranteed by minimizing the possibility of politicians interfering in formal approval processes.
Finally, the time has come to reconsider the imposition of carbon taxes. In theory, such taxes and their equivalent, carbon markets, are an efficient way of reducing greenhouse gas (GHG) emissions. But the absence of such policies south of the border can only lead to carbon leakage, displacing production from taxed regions to those that are not, and thus to a negligible net effect on GHG emissions.
The oil and gas sector adds $100 billion to the Canadian economy each year, and $20 billion to federal and provincial government coffers, in addition to employing nearly 200,000 workers.
Regardless of our personal preferences in terms of energy consumption, and despite the growing presence of renewable energy, an incontrovertible fact remains: Canadians consume large quantities of oil, and will continue to do so in the coming years. Neither governments nor taxpayers have an interest in seeing Canadian oil and gas sector jobs shipped to the United States.
Germain Belzile is a Senior Associate Researcher at the MEI and the author of "Canada’s Oil and Gas Sector at Risk? How Excessive Taxes and Regulations Undermine Our Competitiveness." The views reflected in this op-ed are his own.
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