The following OECD assessment and recommendations summarise chapter 4 of the Economic survey of Canada published on 11 June 2008.
The energy sector is bumping up against supply constraints
The energy sector has been growing at a fast pace, as higher prices, topped up by generous tax incentives, have caused profits and investments to soar. With shrinking conventional oil and gas production, the focus of activity has shifted toward non conventional sources, mainly the vast oil sands reserves located in the province of Alberta. Its rapid pace of development has bumped up against infrastructure bottlenecks and created labour shortages. The provincial government, flush with oil revenues, is greatly stepping up its infrastructure spending, the cost of which has recently increased at a rapid pace. Wage increases have picked up sharply to draw workers from the rest of Canada and abroad, in turn putting pressure on housing, consumer prices and public services. Despite comparatively high inter provincial labour mobility, it is insufficient to cope with Alberta’s pressing needs, and shortages of various skills are acute. Employment insurance should be harmonised across low and high unemployment regions to foster migration towards the former. Barriers to inter provincial trade should be torn down, especially those that hinder mutual recognition of professional credentials (notably in the building trades). Participation of all marginal population groups should be encouraged by tax/benefit, education and training policies. The move by the federal and several provincial governments to the public private partnership model for some infrastructure projects can help to ensure their efficient building and operation so long as they are carefully designed and risks transparently allocated.
Sustainable development of the energy sector should be encouraged by fiscal/tax policies
The Alberta oil boom has created many jobs in the rest of Canada, especially in professional services and in the materials and capital equipment supply industries. However, the induced real exchange rate appreciation has cost jobs in manufacturing based provinces, which are also competing with emerging Asia. For a time the positive job and income spill overs offset the negative ones. However, with the gathering US recession and depreciating US dollar, the balance has been shifting. This is straining the fiscal federal equilibrium and increasing demands for subsidies and transfers. Alberta should implement allocation and withdrawal rules for its Heritage Fund: preferably, it should save all its oil revenues in a foreign asset fund, as Norway does, spending only smoothed yearly fund income. The federal government should consider doing likewise for revenues resulting from transitory terms of trade gains. This would not only avoid Dutch disease effects, but also pre fund ageing costs and share resource wealth with future generations. Tax policies for the oil and gas sector must be updated for the era of high oil prices by: removing the preferential elements of federal deductions for exploration and development; discontinuing “flow through share” agreements; continuing to review Alberta’s royalty regime to ensure that pure economic rents are being captured by the province, while reassessing the federal deduction for provincial royalty payments if that is not the case; and removing the exploration/production requirement for tenure rights.
Effective, market based environmental policies are essential to set a price on carbon
Higher prices have made the exploitation of the oil sands feasible under existing technologies, but they are still extremely intensive in terms of natural gas and water inputs and greenhouse gas (GHG) emissions. Even though Canada signed up to the Kyoto Protocol, its GHG emissions are currently some 33% above the target. It accounts for 2% of world GHG emissions, second only to the United States in per capita terms, and its emissions are growing faster than nearly any other OECD country, mainly on account of rising oil sands production. The government now has a plan to rein in such emissions. However, it is based on intensity targets, rather than absolute levels. At foreseeable oil sands exploitation rates, the government’s objective of getting to within what amounts to 8% of the missed Kyoto target by the year 2020 is probably attainable only if technological breakthroughs are achieved. In that context, the federal government has set aside funds for financing pilot projects in carbon capture and storage. Market based incentives to devise and adopt helpful innovations will be of primary importance, using standards only when there is an identifiable market failure that cannot be addressed by a price on carbon. The federal plan to implement permit trading is a welcome development and should now be implemented expeditiously. It would benefit from having a price corridor to reduce uncertainty both for firms contemplating a choice of production technologies with varying emissions intensities and for researchers seeking emissions saving innovations. Finally, not only in the domain of climate change but throughout the environmental area, the cost of regulations needs to be calculated in a transparent manner and monitored on a regular basis.
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Canada 2008 is available from:
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For further information please contact the Canada Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Alexandra Bibbee, Yvan Guillemette, Shuji Kobayakawa and Annabelle Mourougane under the supervision of Peter Jarrett. Research assistance was provided by Françoise Correia.