Environment & Capitalism Marriage 1 – Government Dirigisme 0

An attendee at a cocktail party given by Export Development Canada during the International Economic Forum of the Americas remarked that inventors and entrepreneurs needed government R&D subsidies to help commercialize new processes. An entrepreneur in new Pipe Organ technology manufacturing, he insisted that his technological advances would never have been brought to market without bridge loans and taxe credits for R&D.

Today General Electric and Sargas of Norway have announced a breakthrough in carbon capture technologie. A new model of GE’s gas plants will be built with Sargas’s new process that would capture 90 per cent of their output of carbon dioxide, which can then be injected into oilfields to squeeze out more crude.

This could be doubly environmentally friendly as such a technology could potentially be used to reduce energy consumption in the energy extraction process to complement such technologies as Steam Assisted Gravitational Drainage which consumes much energy in the extraction of bitumen oil in Alberta or heavy crude in California.

Sargas’ technology which promises to capture up to 99% of Carbon emission in certain instances will now be commercialized by Big Business as embodied by one of the worlds largest, most profitable conglomerates: GE

Since GE’s CEOs are typically anti-tax, anti-big government and republican, one might wonder if Obama and the Democrats of this World will be shaken in their belief of Government economic and social ‘dirigisme’ now that the company promises to do what billions of dollars of American taxpayer money subsidized R&D research could not?

A Conservative Budget

Minister Flaherty scratching his shoe instead of his head

This was probably one of the more tame federal budgets in decades. Although it may be spilling a lot of ink now, expect the upheaval to be very short lived. While the Opposition may pay a little more attention than most to the budget, it is so unremarkable that they will probably return to criticizing such bills as C-10 and C-30 and keep the focus on the Robocalls scandal. As unremarkable as this budget may be, like all budgets it deserves much scrutiny for what was in it, what wasn’t and why its measures are so incremental.

Before we begin scrutinizing the budgets fine print, it must be said that the budget speech had one element in it deserving much praise. Rising up in the house of Commons to deliver his budget, Finance Minister Jim Flaherty spoke often of Canada’s fiscal leadership among industrialized nations. He noted recurring that Canada led the G7 in some manner or form when it came to public finance. Something in the rhetoric changed. After lavishing his government with much praise he proceeded to explain that Canada could not only benchmark itself against the wealthiest nations of the World, but should also compare itself with the ‘fastest’ and most dynamic growing nations of the World. It seems that if anything the conservatives have at least learned that comparing oneself to the wealthiest is no sign of merit when they are the economies that are the most stagnant in the World. This kind of talk can only lead to policy better aligned with the realities of the 21st century World dynamic.

Moving on to some of the less praise worthy moments of yesterday, let’s look at some of the new policies introduced and their short comings. In an effort to fill the glut of job openings in the western provinces the federal government will move to enhance immigration matching. The intentions of the action are praise worthy, the means may also be effective and fair, however one solution has not been explored. Employment insurance in Canada is atomized. While the program is national in scope and the premiums equal in all provinces, the hours contributed necessary for eligibility vary widely across regions, payout lengths are also regionally discriminatory. The result of this is while unemployment remains elevated in eastern Canada, job openings go unfilled in the west. Canada’s EI system encourages Canadians not to move to seek employment it encourages regional structural unemployment. So while the Premier of Saskatchewan is off in Ireland to go recruit that countries skilled unemployed labourers Newfies sit at home cashing in the dole waiting for the fishing season to start again. With standardization of EI across Canada the government could have hit two birds with one stone: reduce lost output in the west because of labour shortages and reduced unemployment in the east because of -job shortages. Than economist say they are puzzled with Canada’s international un-competitiveness, simply shameful.

Another issue Minister Flaherty often raises is the problem of an over heating real-estate market. No signs of cooling down the next Canadian Bubble. While almost all agree Vancouver and Toronto’s markets are over heating and the country is building condos at a breakneck pace, the minister choses to do nothing about it in his budget. The simplest and most efficient way to calm down the real estate market AND reduce the deficit would have been to phase out interest deductibility. This would in a sense incentivise the deleveraging of the entire Canadian economy which could have adverse effects on output if implemented too fast. A measured and gradual elimination of interest deductibility would reduce the tax incentive to speculate with borrowed money hence reducing leverage (bad), speculation, (bad), bubbles (bad) and the deficit (bad). So in fact this could have been a 4 birds 1 stone kind of solution.

One categorically adverse proposition in the budget has to do with the new R&D regime. The current plethora of R&D programs cost Canada $3 Billion or so. The Jenkins Report submitted to the federal government essentially called the money wasteful. The report stated that the money wasn’t helping to foster technology or competitive improvements. While a simple solution would have been to scrap this corporate welfare all together and just drop the corporate tax rate proportionally to the savings, the government decided to go down another path. The Conservatives chose to transform the R&D tax credits into direct subsidies. Completely reprehensible and irresponsible. Not only will bureaucrats start picking winners and losers. The R&D programs will now be open to graft, bribery or political interference as has been seen in other jurisdictions. Canadians often admonish Americans for not emulating their successful policies. Well I think it appropriate for Americans to admonish Canadians for emulating their failures. That the federal government hasn’t heard of Solyndra, a near household name down south, is a testament to narrow vision. At least government intervention, interference and market distortion seems to stop there in this budget.

Corporate and personal taxes not part of the plan, eh? No new corporate tax rate reductions planned. This is probably the Conservatives not adding salt to their unions wounds. Why unions love corporate taxes is still beyond me, but in any case no drops in personal and corporate taxes are envisioned. This is objectionable. The corporate tax remains one of the largest sources of economic inefficiencies  and a double tax on the wealthy and middle class. Any lack of effort on this front is meritorious of its own lambasting post. Canada remains middle of the pack in the OECD in terms of corporate taxes, as the Finance Minister said himself we need to compete aggressively with the up and coming economic powers of tomorrow not the stale economies of the yesterday.

The cuts to government departments’ operating budgets are mild and inconsequential to say the least. As has been mentioned by other commentators, the cuts in civil service employment levels do not even match the Conservatives hirings since 2006. Canada will still be saddled with more bureaucrats than before the Conservatives took office. The planned yearly operating efficiencies of $5.2 Billion. When Canadians were being fed numbers between 4 and 10 Billion dollars the actual number is only conservative in its timidity and aversion too splashiness. In terms of defining themselves as fiscal conservatives, the governments efforts are halfhearted at best. Some of the long term efforts at spending consolidation deserve applause: OAS change from 65 to 67, enhanced OAS benefits after 70 and all civil servants increased pension plan contribution. The short term efforts leave many, including the Canadian Taxpayers Association, short of admiration.

One important announcement, although not budgetary in nature, will surely get greeno Mulcair riled up. The government’s plan to cap all environmental reviews to 24 months (thats two whole years for those not paying attention) is a great boon to Canada. Let’s just admit it their is no reason (even for environmentalists) to want businesses to expand resources, government bureaucrats to waste time and the Canadian economy to lose steam just so that great business projects get merely slowed down by our overly stringent and public review system. That’s not to say that when talking about Canada’s pristine Wild we should all be environmentalist, but when an energy project is good and going to get approved anyway why waste everybody’s time. Seriously Green Peace, the Oil Sands may be bad (I didn’t say are, I said maybe) they’re a bleep in the environments radar, you should be scared of China’s industrialization, not northern Alberta’s botox gone awry.

The bottom line is that this is a timid, non-game changer budget. This is not how to win fiscal conservatives votes. This is not how to improve fiscal or macro-prudential policy. None the less it’s not a terrible budget, there is more good than bad. Let’s hope this budget is popular enough to convince people to let the Conservatives do what they got elected to do: Make government smaller!

Shout out to our Malaysian readers,

Cius

Wealth Denial by Environmental Regulation

I just finished watching a report on the future of nuclear power plants’ safety design on the Wall Street Journal’s website. The short report got me thinking about the regulatory processes for large energy infrastructure projects building in the western world. Here are a quick few facts I looked up while thinking about this issue. No new building of nuclear power plants since 1974 in the US (although two new permits emitted recently), no major oil refineries built since 1976 in the US and recently the permit refusal of the Keystone XL pipeline from Alberta to Texas. In Canada the public backlash against Enbridge’s Northern Gateway pipeline from Alberta to the Pacific Coast, the permit refusal of the Prosperity copper and gold mine in British Columbia’s North  and talk of shutting down Quebec’s only nuclear power plant are symptomatic of the pernicious decease that is “Not in my Backyard Syndrome”. In Germany and Japan plans to scrap nuclear energy altogether are further signs of NIMB syndrome’s widespread contagion. Such thinking isn’t exactly illegitimate, I mean  who wants an oil spill in their backyard, a stinky refinery next door or a Fukushima disaster anywhere? Are these knee jerk reflex reactions to energy projects really the way we should be approaching the issue of energy production and distribution?

In the case of Alberta the current discount between a barrel of Edmonton Ligh oil to a barrel of NYMEX traded West Texas Intermediate is approximately 9 dollars which itself trades at a 19 dollar discount to ICE traded Brent Crude. So because of a lack of cheap oil distribution infrastructure Alberta oil is on average being sold at a 15% discount to world oil prices. At a production clip of 1.6 million barrels of oil a day, off the top of my head, that comes out to a loss of exports of 11 billion dollars a year at current prices. That means that those opposed to building Northern Gateway aren’t shy about about reducing Canadian GDP by almost one percent every year. In other words Canadians are on average close to 1% poorer because of environmental concerns over one single project! This is just one example of the cost of overzealous environmentalism.

What is worrying isn’t the current state of affairs of environmental regulation. It is its unambiguous radicalization. While many believe regulation serves the goal of expertly minimizing environmental risk while minimizing lost economic gain, this is no longer so. The political and regulatory processes of environmental protection have definitely taken a drastic left turn. Increasingly, the politics of environmentalism and the regulation of the environment are no longer the purview of experts and professional civil servants. The main actors are now politicians, green lobbyists and special interest groups. Prudent regulation has given way to public and populist regulation. While studies tend to prove that environmental damages due to the energy sector are on a secular downtrend (here is just one somewhat dated study http://bit.ly/xGE2Yw), opposition seems to be growing daily. While recent NASA images (http://natpo.st/xjCIbN, http://1.usa.gov/azQJcY) have shown that the Alberta Oil Sands aren’t an environmental “game-over” by a long shot, the environmental polemic has been ferocious over Keystone XL.

Public concern over nuclear safety has pushed two of the worlds greatest energy consumers (Japan & Germany) to shy away from nuclear. No research, no inquiries, no commissions just decisions. Everyone understands the casual observers reticence with pursuing nuclear energy in Japan following the Fukushima crises, however one still expects rational voices to emerge to remind the Japanese that nuclear is environmentally clean (not around Fukushima of course), statistically safe and that the real culprit is not the energy source itself but its criminally lackadaisical handlers. Germany which produced 22% of its power in 2010 from nuclear now wants to shut down all facilities by the next decade and replace them with wind and solar power. Simply laughable. As nuclear production went down in Germany, energy imports from France’s nuclear energy sector jumped. So much for reducing nuclear dependence eh! Japan itself is now importing record amounts of fossil fuels to power its economy, registering its first structural trade deficit in a long time. When Osaka’s air looks like Beijing’s and people start dying from smog related diseases, I wonder if nuclear will seem so bad?

Turning back to Canada it is worth noting where environmentalism gets its grassroots. Sure all big cities have their Occupy Wall Street semi anarchic enviro-fanatics, but it is a particular faction of opportunistic greenos that are of interest to me. First Nations are the cream of the crop in terms of pesky regulatory sabotage of energy projects. In Quebec their grievances (real and fictitious) serve only  the purpose of extracting further economic gain from the feeble hearted politician. Countless hydroelectric projects have been stalled, reassessed given up or simply passed over because of the threat that is the local band council. In British Columbia, First Nations people along the cost pay some convincing lip service to environmentalism. However the slew of LNG plans, aluminum smelting plants and pre-existing pipelines indicate that their real concern is getting the right price. Such overt and unapologetic environmental regulation blackmail should be unacceptable in a social democracy. Delaying and depriving an entire country of significant wealth just to get a fatter piece of the cake is simply put selfishly immoral. It is a pity the expression social parasite was already invented, as Canadian first nations and opportunistic environmentalist the World over epitomize the term.

Here’s hoping someday energy production and distribution can return to a place of civil and rational thinking and debating, so that we may actually do some real environmental good and not kiss so much wealth àdieu

Pipeline a-bust?

Reports from Reuters and the Wall Street Journal claim that the White House is about to refuse permitting of the Keystone XL pipeline from Alberta to Texas. The reports also state the White House will permit TransCanada to reapply for the permit to a redrawn pipeline avoiding the Nebraska aquifers. Okay unsurprising decision by the Obama administration on this one. Realizing that some of Obama’s donors and staunchest supporters are tree-hugging, scorched-earth theorists hippies, the administration seems to be speeding up the regulatory process in preparation for the up-coming presidential election later this year. Mind you these are un-confirmed reports so far, yet reports we are sure at the very least represent Obama’s views regarding hydrocarbons in general.

Now the public reason for such a potential refusal would be to save the Nebraska aquifers which serve as the tap and drinking water of millions of inhabitants of the region. The political reason for such a refusal is the belief that Canadian Oil Sands, or Tar-Sands as the green mouvement calls them, are the dirtiest oil sources one can find and developing them imperils the global environment. Let’s adress these two issues shall we.

Regarding the fear of contaminated water and soils in Nebraska. I’ll admit that I understand it. I wouldn’t particularly like a big oil pipeline crossing my backyard either, especially given Enbridges pipeline leak in Michigan last year and the Gulf of Mexico Macondo well spill calamity of 2010. Now that would be my gut feeling reflexive reactionary thoughts right there. However my brain would eventually kick in and my train of thought would go somewhere along the lines of: Hey! no pipelines were involved in the GoM oil spill, serious case of apple and oranges comparisons going here. What of the Enbridge pipeline spill in a Michigan river? Well it was one of the first large scale spills in a long time to actually get reported on, why so? Apparently a little research reveals that pipelines have better safety records than airplanes do, who in turn have better safety records than cars. As I eye my own vehicle suspiciously after these thoughts, my mind turns back to the issue at hand. The over 3000 km Keystone XL project was only slated to increase the total US pipeline gride by ~1%. Much of the US pipeline grid is old and in need of replacing. Furthermore it is overstretched capacity is running at maximum on much of the grids routes. I am only speculating here but wouldn’t it be better if we  switched some of the oil flow from old decaying infrastructure to the most up to date technology in pipeline safety design? I’ll let the engineers answer that one but the answer seems quite self-evident.

Now assuming for a moment that the project never goes forward, what would be some of the easily identifiable consequences. One of the gravest consequences from an American perspective that I can think of would be increased dangers of oil spills. What was that? you say. Well, the most rapidly expanding production of oil in North America isn’t actually the Oil-Sands right now, it’s actually the Bakken oil fields in North Dakota. How does the oil from ND make its way to US refineries in the Mid-West or Texas you may ask yourself, the answer is by train. Oil from that region which could have been transported by Keystone XL or an attachment to the latter, is transported by freight-train hauling. If you’d ever looked up the safety record of freight-trains on Google you’d be a hell of a lot more worried than by pipeline trust me. Spilling petrochemicals from freight-train accidents are virtually a yearly norm in Canada where our two main freight-train companies have some of the best safety records in all of the Americas. But hey! suit yourself Obama. (In his defence it’s probably the EPA’s fault for being unable to study collateral benefits and consequences of their decisions)

Now let us look at the issue from a more global perspective, something the greenies claim to do. If Keystone XL doesn’t go through the most likely outcome will be the permitting of Enbridge’s Northern Gateway pipeline to the Pacific port of Kitimat. The result of that wold be simply increased CO2 emissions on a global level. How do we get to that conclusion? Firstly the oil will have to be transported to China or other regional industrial countries by super-tankers. No matter how efficient they’ve become over the years they don’t beat pipeline in terms of efficiency. Especially given that the distance travelled will be twice as long. Now we talk about the US being the biggest polluter in the world and China running a close second. A little detail forgotten quite often is that of efficiency per emissions. For virtually the same consumption of energy and pollutant emissions the US generates roughly three times more output (wealth), let’s not even broach the per capita quagmire. So Canada will have to send  the crude oil to be refined in some of the least environmentally efficient refineries in the world.

All this to say how can the best intentions in the world (save the planet from apparent environmental Armageddon) always lead to a worse outcome (more spills, more emissions and more deadweight loss: less global wealth). Mister Obama please think wisely before caving in to your green lobby please.

P.S. Since I now have to go to class I’ll leave aside talk of Canada’s Oil sands being all that dirty a point I’ll refute next time!

P.P.S. Leave comments, argue, get mad, it’s the internet there are thankfully no fist-fights to be had here 🙂