Uncompetitive policies continue to hammer Canada’s energy sector
The outlook for Canada’s energy sector remains poor, thanks to a perfect storm of weak commodity prices, positive reforms by our competitors and poor policies at home.
Consider some recent developments. Two controversial federal bills—C-69 and C-48—were passed into law late last month, after more than a year of fierce opposition from senators, provincial policymakers and industry leaders.
Bill C-69, which overhauled Canada’s environmental review process, will make the regulatory system for major energy projects even more subjective and uncertain, raising serious questions about whether future pipeline projects will ever be built due to the increased costs associated with the new process and its heightened uncertainty.
Similarly, Bill C-48, which bans large oil tankers off British Columbia’s northern coast, is another barrier to exporting Canadian oil to Asian markets, where oil commands a higher price.
All of this comes on top of other changes by the federal government and many provincial governments (including the previous government in Edmonton) including a provincial cap on greenhouse gas emissions, new regulations of methane emissions, stricter ethanol regulations and a mandated coal phaseout.
The Trudeau government is also developing a clean fuel standard designed to cut carbon emissions by 30 million tonnes annually by 2030. Essentially the Ottawa will mandate that firms selling gas, liquid and solid fuels reduce the amount of greenhouse gases generated per unit of fuel they sell. And of course, Canada’s energy sector continues to suffer from a lack of pipeline capacity, which greatly reduces the price Canadian oil producers receive for their products.
On the tax front, governments across Canada have raised or maintained already high taxes on the energy sector. For example, Ottawa’s federal carbon tax came into effect earlier this year at $20 per tonne and is set to reach $50 in 2022. Saskatchewan currently has the highest marginal tax rate on new oil and gas investment in North America, while British Columbia has some of the highest marginal tax rate on new natural gas investments.
In stark contrast to the Canadian experience, the U.S. energy sector has enjoyed significant deregulation and sweeping tax reforms. The U.S. government has reduced its business and personal income tax rates and significantly reduced the regulatory burden for the energy sector by scrapping or scaling back several energy-related regulations including controls over power-plant emissions and fuel economy standards, making the country more competitive.
The cumulative effects of Canada’s policy changes, particularly compared to the United States, has damaged the investment climate for Canada’s energy sector, with many investment analysts and industry executives now warning that oil and gas investment is increasingly moving from Canada to the U.S. Not surprisingly, recent data underscores the deteriorating investment climate in Canada. Between 2016 and 2018, the U.S. enjoyed a more than two-and-a-half times increase in investment in upstream oil and gas (essentially, exploration and production) compared with Canada.
Crucially, Canada’s decline in capital investment in the oil and gas sector wasn’t inevitable—it was created right here in Canada by poor policy decisions by multiple governments. Yet there’s been little—if any—action by governments to reverse these decisions.
Given the importance of Canada’s energy sector to the economy, policymakers should move quickly to restore the sector’s competitiveness by striking a better balance between environmental protections and resource development.
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