Death by a Thousand Cuts? Western Canadaas Oil and Natural Gas Policy Competitiveness Scorecard

Abstract

Pipelines face delays or are not built at all. Governments are adding greenhouse gas emissions prices. Provinces have introduced higher corporate income taxes. Property and other municipal taxes on energy producers have also been on the rise. Taken together, what are the costs of these recent policies for the western Canadian energy sector? And how does each compare in its effect on the competitiveness of Canadian provinces, both in relation to each other and to US energy-producing states? To assess the effect of policy-induced competitiveness costs on energy producers, this Commentary calculates the cumulative change in profitability that energy producers would face for an otherwise identical well because of government policies that affect taxes and pipeline access. In the first of what will be an annual series – updated as policymakers change the policy-induced costs on conventional oil and natural gas producers – this Commentary finds that: • pipeline constraints have greatly reduced the price that oil producers receive. This effect is by far the largest competitiveness cost on energy producers; • corporate taxes and provincial royalties are major policy costs for producers. Canadian provinces have historically been competitive with the US on taxes, but recent changes in the US highlight the need to examine the cost of taxation – the outcome of Alberta’s recent royalty review was a step in the right direction; • greenhouse gas emission taxes have been big news politically and publicly, but so far have not been economically important for energy producers. Further, the Alberta (and similar federal) system gives companies a strong incentive to reduce their emissions with little competitiveness cost. Indeed, companies with below-average emissions are better off under the current system; and • finally, property and municipal taxes have enormous variation across Canada and the US. There is room for provinces to reduce the cost of both provincial and municipal property taxes on energy producers. Policymakers now need to take steps to ensure that approved new pipelines get built and to reduce the burden of corporate income, royalty, property and greenhouse gas emissions taxes.