Tax breaks—not government ownership—to mitigate Ottawa’s harm

In a recent speech, before the COVID-19 crisis exploded, Premier Jason Kenney hinted that the Alberta government might take an ownership stake in future oil and gas development. Although Kenney is understandably concerned about the chilling effect Ottawa has had on energy investment, government is ill-suited for corporate management. To offset harmful federal policies, it would be wiser and more efficient to use targeted tax breaks and regulatory relief at the provincial level.

In response to the recent abandonment of a $20 billion oilsands project, in his speech Kenney reminded listeners of the Alberta Energy Company (AEC), a Crown investment firm that (by 1975) was owned 50/50 between public shareholders and the province of Alberta. The AEC was spearheaded by then-premier Peter Lougheed who reportedly didn’t believe his support for (partial) government ownership in an energy company was “a denial of his free enterprise philosophy.”

For Kenney’s part, he too argues that if the province of Alberta were to revive the legacy of “an agency or corporation similar to the AEC in the 1970s,” that this would merely be to offset the uncertain regulations “and frankly hostile policy-setting from Ottawa.”

Kenney’s worries are completely legitimate: Besides the federal carbon tax, federal Bill C-69 and Bill C-48, passed into law last year, present real barriers to energy development in western Canada, through a tightened (but more political and uncertain) environmental review process and a restriction on large oil tankers’ ability to take exports from the British Columbia coast. Tighter federal standards on methane and ethanol are other examples of Ottawa’s “hostile” policy.

Although these policies were justified by concerns over climate change, Premier Kenney is right that these federal moves have hindered energy development. This is economically damaging because it makes electricity and transportation more expensive for consumers, and also negatively impacts the workers who would have been hired in new development projects but are now not needed.

Even so, the proposal to have the Alberta government itself invest in energy projects (or to give backstop guarantees to private investors) is a very blunt instrument, which might end up causing Albertan taxpayers a double whammy. If federal policies cause private investors to pull out of an energy project in Alberta, it’s because they think that Ottawa’s decisions have made the project not worth the risk.

If now the provincial government effectively forces taxpayers to invest in the project, that decision doesn’t magically render the project a good risk after all. It merely means that taxpayers are implicitly having their money sunk into a project that professional investors have decided isn’t worth it.

Rather than the government becoming a hedge fund, it would make more sense to engage in targeted tax and regulatory relief. For example, Alberta could waive any provincial-level taxes—including an offset to the federal capital gains tax—for those companies deemed to have been unduly harmed by Ottawa. This would still “invest” the forfeited potential tax revenue, while retain the advantages of private investors making business decisions with their own funds on the line. The province could continue the reform of the Alberta Energy Regulator so that developers can be certain of the rules.

Premier Kenney is right to want to offset harmful Ottawa policies, but provincial ownership of energy companies is a dubious proposal. It would be wiser and more efficient to target tax and regulatory relief to offset federal burdens.