Proceedings of the Standing Senate Committee on
Transport and Communications
Issue No. 6 - Evidence, September 27, 2016
OTTAWA, Tuesday, September 27, 2016
The Standing Senate Committee on Transport and Communications met this day at 9:30 a.m. to study the development of a strategy to facilitate the transport of crude oil to eastern Canadian refineries and to ports on the East and West coasts of Canada.
Senator Michael L. MacDonald (Deputy Chair) in the chair.
[English]
The Deputy Chair: This morning, the committee is continuing its study on the development of a strategy to facilitate the transport of crude oil to Eastern Canadian refineries and to ports on the East and West coasts of Canada.
I wish to welcome our witness. Dr. Ross McKitrick is Chair of Energy, Ecology and Prosperity at the Frontier Centre for Public Policy. Dr. McKitrick is also an economics professor and Chair in Sustainable Commerce at the University of Guelph, where he specializes in environmental economics. His areas of expertise include the relationship between economic growth and pollution, as well as the relationship between numerous aspects of science and public policy.
Please begin your presentation, and afterwards the senators will have questions.
Ross McKitrick, Energy Chair, Frontier Centre for Public Policy: Good morning, everyone. I'm a professor of economics, as you heard, at the University of Guelph, where I specialize in the economics of environmental policy, including energy and climate change related issues. I am also a Research Chair in Energy, Ecology and Prosperity at the Frontier Centre for Public Policy.
In my remarks today I would like to make three simple points.
First, it is an accident of nature that pipelines form a bottleneck in the channel connecting petroleum products to the market. But this does not justify using the pipeline regulatory process to create de facto environmental regulations that failed to win approval through the normal legislative channels.
Second, the context for discussing the environmental aspects of pipelines development is an enormous reduction in vehicle-related air pollution that has occurred over the past few decades, even as motor fuel consumption has risen steadily.
Finally, time is not on the government's side on this issue. Economic trends in Canada and the rest of the world are not encouraging, and the longer this issue festers, the more damage it will do to our economy and our national unity.
Turning to my first point, in most sectors of the economy, distribution of a product to retailers is handled by a competitive transport sector with many small players operating on many routes. Nobody would think of using road blockades or truck sabotage as a form of environmental policy. Aside from the inherent inefficiency, it would be futile, since the products would still get to market by alternative means and alternate routes.
But motor fuels depend on a pipeline for at least part of the journey. The fact that the product delivery route narrows to a single channel at one point does not mean that blockading that channel is an efficient or sensible way of accomplishing environmental goals. It is merely an accidental result of the fact that the technology of pipelines creates what economists call a "natural monopoly.'' This refers to any situation in which economies of scale exceed the size of the market, so eventually only one supplier will dominate. In such cases, including pipelines, it makes sense to create a regulatory agency to oversee capacity development and pricing.
Just to emphasize, the fact that you're discussing pipelines is an accident of the fact that pipelines are a natural monopoly. There can only be one supplier, and that needs to be a regulated monopoly.
Environmental regulations are developed separately. They emerge through the ordinary democratic process of legislation and ultimately are subject to the approval of the electorate. Debates over the merits of these rules should take place through the exchange of arguments and the taking of votes. Allowing activists to exploit the natural monopoly of pipelines to impose an environmental agenda that failed to win support through the environmental policy-making process undermines the integrity of our rule-making system.
In short, the regulatory oversight of pipelines should focus on those aspects that relate directly and specifically to the public interest in pipelines — namely safety, profitability and pricing. Environmental targets for air pollution emissions, including greenhouse gases, should continue to be dealt with through the environmental rule-making system. People who are unhappy with the current mix of environmental regulations can make their case in the forums in which such regulations and rules are debated, rather than by blocking the development and operation of new pipelines.
My second point is that some of the opposition to the development of new pipelines appears to be based on the belief that petroleum-related air pollution in Canada is high and rising and needs to be reduced. But the data show that this view is simply untrue. Here are some salient facts about air emissions related to motor transport in Canada.
From 1990 to 2014, motor fuel consumption in Canada rose from 2.5 million to 3.5 million cubic metres per year, a 40 per cent increase. Yet over the same interval, motor vehicle particulate emissions fell from 150 megatonnes annually to 60 megatonnes, a 60 per cent reduction. Over the same interval, NOx emissions from motor vehicles, which are implicated in smog formation, fell by nearly 50 per cent, and carbon monoxide emissions fell by 70 per cent.
Declining contaminant concentrations in Canadian cities prove the reality of this improvement. Environment Canada maintains detailed national archives of urban air contaminants at NAPS, the National Air Pollution Surveillance program. I have graphed the entire NAPS records for every city in Canada at a website called YourEnvironment.ca. The record clearly shows that despite the large increase in vehicle usage, vehicle-related air pollution concentrations, like carbon particulates, NOx and carbon monoxide, have dropped over the past few decades and are today at historically very low levels.
This is a result of the development of technologies like catalytic converters and more efficient engine designs that allow us to continue using reliable, low-cost motor fuels while going farther and emitting fewer and fewer tailpipe emissions. Decoupling motor vehicle usage from urban air pollution is one of the great intellectual and engineering achievements of the post-war era. It represents a smart approach to sustainable development and has yielded enormous payoffs for Canada in the form of cleaner air and the many economic and employment benefits of inexpensive transportation and secure access to domestic energy sources.
By contrast, blockading pipeline resource development is neither a smart nor a sustainable approach to pursuing environmental goals. The petroleum products will still get to market, likely by means that cost more and have even worse environmental implications.
The cost of such actions will not fall equally across the country, and this goes to my third and final point. Time is not on the government's side. The longer Western Canada is made to wait for the opportunity to develop its resources and get the world price for them, the larger the costs of the foregone opportunities and the greater the resulting resentment will be, especially since Alberta is already experiencing so much economic stress due to the downturn in the oil sector.
Also, the Western world is getting locked into an extended period of economic stagnation, with the added risk of possible triggers for a new financial crisis, such as the high level of non-performing debt in the Chinese banking system, the possible insolvency of Deutsche Bank and the likelihood of another bailout crisis in the peripheral EU countries. A pipeline project connecting Alberta to a major coast would be a sensible and environmentally responsible development initiative at a time when such job-creating opportunities are sorely needed.
Canada's new government enjoys a high level of popular support. But what is the point of having all that political capital if it is not used where it is needed? Completion of an interprovincial pipeline would be a boost for national unity and economic development, and it would be entirely consistent with the smart, technology-driven approach to environmental management that we have successfully pursued for many decades.
The Deputy Chair: We will start with Senator Mercer.
Senator Mercer: Thank you for being here. You talked about time not being on the government's side, but I want to get to the fact that you presented about fuel consumption rising from 2.5 million to 3.5 million cubic metres per year. That was up 40 per cent, but at the same time there were reductions in pollutants. Can you tell us the source of this data?
Mr. McKitrick: They're in the footnotes. The motor fuel consumption is in table 134-0004 at the CANSIM archive at Statistics Canada. They publish monthly fuel consumption figures. The emissions data are on the Environment Canada website. They're collected through the National Pollutant Release Inventory, and I've put the link down there. The NAPS archive is a separate record. I didn't plot specific data, but the NAPS archive is online at Environment Canada, and I've also graphed all the records at the website YourEnvironment.ca.
Senator Mercer: Don't get me wrong. I wasn't questioning the data. I just wanted to establish the source for the record, because when people hear and see this on television they will ask, "Well, where did you get those numbers?'' Now I know, we know, and the public knows.
The interesting thing is that the media doesn't pick up on these numbers, and it isn't reported this way. It's always reported in a more negative format.
You go on to say the longer Western Canada is made to wait for the opportunity to develop its resources and get the world price for them, the larger the cost of the forgone opportunities.
Are you suggesting that the government short-circuit the approval process for the pipelines and make a decision that skips some of the steps that are currently in place?
Mr. McKitrick: You used the word "short-circuit.'' That suggests bypassing procedures. I wouldn't suggest that. But some discretion is involved in how long to make the approval process and how many steps to add to it.
Senator Mercer: So shorten it?
Mr. McKitrick: Shorten, understanding that there are some constituencies that will never be brought onside, and if you're extending the process in the hopes of having unanimous support, you're never going to get unanimous support.
[Translation]
Senator Boisvenu: Welcome to all my fellow senators. It's the end of a fine summer. The weather was beautiful in Eastern Canada. I don't know whether it was as nice in Western Canada.
Welcome, Mr. McKitrick. We know that Prime Minister Trudeau recently announced his intention to sign a free trade agreement with China. We know China's energy needs, especially its oil needs. Based on the rapid growth of vehicle sales in China, we know the country will need a great deal of resources for its vehicle fleet.
In terms of the discussions between Canada and China, do you think natural resources play an important role in a free trade plan?
My second question is the following. Regarding access to resources, do you think one of the conditions for signing a free trade agreement with China would be the obligation to construct a pipeline in both Eastern and Western Canada?
[English]
Mr. McKitrick: My expectation would be that one of China's motivations for entering into an agreement with Canada would be to get some kind of provisions similar to the provisions in the Canada-U.S. Free Trade Agreement, which, as you may recall, included an energy chapter. That energy chapter included a requirement that Canada couldn't arbitrarily cut off supplies to the U.S., that we had to give them some preferential access. China may seek that. I think it would be unlikely that they would add a condition requiring the construction of a pipeline. Within trade negotiations, I think that would be seen as too much intervention in another country's internal deliberations.
China, as you pointed out, has considerable need for petroleum and energy resources, and they are actively developing import relationships with other countries. Certainly Canada would be a good supplier for them because of our stability and our historical ties with China. I would imagine that will be a major component of their discussions.
[Translation]
Senator Boisvenu: Two things concern me. The first is the American presidential election. One of the candidates, Mr. Trump, intends to review NAFTA. Mr. Trump argues that free trade has hurt job creation in the United States. China is asking for access to our resources. This topic will play a key role in the discussions with Canada.
The transportation of oil by rail worries me because it's increasing. In its discussions with Canada, do you think China could impose the construction of a pipeline as a condition?
[English]
Mr. McKitrick: Rather than the Chinese government demanding a pipeline as a condition for signing a trade agreement, it's more likely that private investors from China would want any further investment in the oil sands sector to be conditional on a pipeline being approved. That would make sense from an investment point of view.
The Government of China is free to ask for anything it wants in trade negotiations, but I do think it's very unusual for a government seeking a trade agreement to demand an outcome of another country's own legislative process. That oversteps the authority of trade negotiators, whereas investors are, in my view, quite likely to indicate that they're not prepared to back any further developments in the Western oil and gas sector unless a pipeline is approved and construction is completed or at least is likely to be completed, because they're not getting the world price for the product. They're creating an infrastructure where they're captive to a single buyer. There are other parts of the world where they can invest and have a supply of oil getting the world price.
Senator Unger: Thank you, Dr. McKitrick. I'm from Edmonton, so hearing your words is like music to my ears. I just agree with it so much. And Alberta is in a very desperate situation, which I think you've spoken about.
I have two questions. We're seeing a struggling economy in Alberta being made worse by questionable environmental measures, and I'm thinking of a carbon tax, first an Alberta one and then a federal one to come, and a greenhouse-gas cap on oil sands emissions along with that moratorium on the West Coast, and who knows how that will go.
Do you think the government is striking the right balance between the economy and environmental protection? Again, I'm thinking of mostly my Alberta premier, who imposed these taxes with no quid quo pro with anybody else. What can the federal government do to make sure that the economy and environmental concerns stay in balance?
Mr. McKitrick: As I mentioned in my presentation, I could have flooded you with more data on this same point. We have made dramatic improvements in air quality in Canada, right across the country but including out West, as a result of historical policy decisions but also through the development of better technology and cleaner motor vehicles. We have a mix of regulatory measures now that I think represents a perfectly adequate handling of the desire to have reliable, inexpensive motor fuels and energy supplies, and air quality and water quality and other similar things that we seek.
I am concerned, for instance, about the current discussion of a carbon tax. I've studied carbon taxes; I did my PhD on them back in the early 1990s, long before most people were thinking about them. The economic argument for carbon taxes assumes that you don't already have a whole mix of regulatory measures in place. If those regulatory measures are already in place, adding a tax on top of them no longer makes economic sense. It doesn't get you any efficiency in the system; it just increases the cost of the existing package of regulations.
The logic of a carbon price is that it sets a ceiling on what you're expecting emitters to pay. It says you're going to have to pay a cost for the emissions you generate, but we don't want that price to go through the roof. We want it to hit a certain level.
The greenhouse-gas cap that you mentioned: Some of my colleagues have looked at what that translates into on a per-tonne-of-emission-reduction basis, and the cost comes to around $1,000 per megatonne of emissions that are reduced.
In the case of the coal phase-out in Alberta, similarly, sure, there will be some reduction in greenhouse gas emissions, but the cost is anywhere from $500 to $1,000 a tonne. The biofuels mandate is another one introduced at the federal level. It's hard to put exact numbers on it, but the cost, again, would be well over $300 a tonne to the economy for each tonne of greenhouse gases that are reduced.
Those are cases where, for the benefits we get, we couldn't possibly value those benefits anywhere near the costs that are being imposed. So the situation that we had up until now I think represented a pretty good balance of our priorities, and the results were very clear, as I've mentioned: improved air quality, improved motor vehicle efficiency, development of the oil and gas sector, and access for households to low-cost energy supplies, most of them produced domestically.
I would think that now we're moving seriously into overkill on the environmental regulation side and pursuing smaller and smaller benefits at higher and higher costs. Those costs are real, and in the case of Alberta they're going to add to a burden. Now is certainly not the time you'd want to be adding to the burden of Alberta. As you know, there are serious employment consequences of the decline in the oil and gas sector.
Your premier might have been hoping that with some high-profile environmental policy initiatives, this magical social licence would appear, but even her own party didn't back her. And the people who were opposed to pipelines two years ago remain opposed today. I think nothing will bring them onside. Again, it's a matter of you're not going to get unanimous support, and there's a certain constituency out there that just won't be brought onside no matter what.
Senator Unger: Thank you very much. I know that we will never get everyone onside, but when, just recently, a group of First Nations announced that they were forming this particular group in direct opposition to Alberta's oil sands, that is anti-oil sands sentiment, I think, if I've ever heard it. The groups seem to almost be amorphous. They get bigger, and then they go less vocal for a while.
What would be a way for us to combat this sentiment that a pipeline might actually get approved?
Mr. McKitrick: I looked at the news coverage of the formation of the First Nations group that you mentioned. I was trying to understand the specific argument. What was the specific concern that they were raising? I found it a little difficult to pin down what their particular concerns were. That makes it difficult to know how to respond. If there are specific issues related to land management or air emissions or things like that, then you can start to get into the numbers and see what the concerns are and how they can be addressed. If, however, it's just purely conceptual, if they're just saying, "Under no circumstances will we agree to this,'' then in effect they're announcing that they don't want to be part of the discussion. I don't know, at that point, what can be done to make a happy resolution.
I did notice, though, in the same news coverage, that there are other First Nations groups that have experienced the benefits of development on and around their lands, and they have a different story to tell, which is that it brought opportunities and that they were able to work out arrangements that were beneficial to all sides. I would hope that's a conversation that can happen in the First Nations community, that some of the very conceptual concerns that don't seem to be rooted in specifics could be addressed by having the groups talk among themselves to find out what the actual experience was of Native groups that have made partnerships and had development take place on their lands.
Senator Black: Doctor, I'm very appreciative of your presentation this morning. Just like Senator Unger, I'm also a senator from Alberta. Before I came to the Senate, I founded the Energy Policy Institute of Canada. I can tell you that over the 10 years in which I've been involved in these conversations, your presentation is as rational and as refreshing and as focused as any I have heard. Thank you very much for that.
Please tell me that you're going to get this message out. I'm glad you're here with us today. I'm glad this is being televised. But you have a rational point of view and, I would also say, a balanced point of view. So please, through your role, through your Frontier institute, through the offices of the various senators, if we can make you available in various places to express this point of view and you have the courage, which you obviously do, to do it, we would want to be helpful.
Mr. McKitrick: I'm glad that my presentation has been helpful. I understand you have a very difficult job to do. I can imagine that not every witness that you've had has been onside with pipeline development, as I am. I'm a professor at a public university, and I'm at your service to make my research available. The presentation that I have here I'll post on the Internet and disseminate it that way.
Other than that, you've raised the question of whether I could be available to disseminate this information in other forums, and, by all means, I'm happy to give you any assistance that I can.
Senator Black: We'll certainly give some thought to that.
I have a question as well. Your focus this morning was, appropriately, on pipelines, and we're grateful for that. Could you please indicate whether your views apply to the approval of LNG projects on the West Coast of Canada?
Mr. McKitrick: To be honest, I have not looked at all at LNG. In principle, I think there are regulatory processes. Given the way Canada does these things, I would expect the energy regulators are very thorough and consider all the risks and the benefits and the costs appropriately. But there will always be specific aspects of them, especially dealing with the West Coast geography and tanker traffic, that I don't know anything about, so I'll leave that one aside.
Senator Eggleton: Let me ask you about a comment you made twice. You said that time is not on the government's side. Is time on the industry's side? We have a situation where the National Energy Board is seized with the matter, and they're in a bit of a muddle, so it seems, at the moment. It is taking longer and will still take longer. There is the economics of oil. The Americans are becoming more self-sufficient. There are other means of getting oil and gas that are being explored, fracking, for example. The price of oil, of course, does not lend itself very well to development of the oil sands at the moment, or further development of the oil sands, and this has involved some lack of investor confidence in Alberta oil. When you put all that together and look at the timing that this is going on, you talk about the government having political capital. It also has a lot of political capital in the First Nations community. It has talked a lot about those issues. Here we have the First Nations community coming up on the other side of this issue, or at least some of them are. They have, of course, not only a general environmental concern, like all of us would have environmental concerns, but they also have the specifics of it being the land that they're on, or the land that they're on being affected by what might happen adjacently.
When you throw all that together, is time really not against the industry on this as much as it is against the government?
Mr. McKitrick: If I understand your point, it is conceivable that you might get to the end of a process where the government clears the way and says, "We approve this. Go ahead and build a pipeline,'' and then the industry might come back and say, "Well, we're not going to build it anymore because the economics don't work any longer.'' In that sense, it may be that time is on neither side.
If that's their decision, then that's the one you go with. You don't want to get into a "white elephant'' that costs more than any revenues that would ever be generated.
My point here is that if you look at historical resource development, historical projects in Canada, and the era of C.D. Howe and the early pipelines that were built, you could argue that there wasn't enough consultation then, but those were still processes that were measured in months and a few years. The pipeline approvals process now is so long, I just can't imagine any company seriously wanting to invest in this or any major firm being willing to run the gauntlet of the layer after layer after layer where everybody seems to have a veto.
The situation that we're in — for instance, since the financial crisis in 2008, the U.S. economy hasn't really recovered. They've been eking out 1 or 2 per cent growth, but a lot of that is attributable to large deficits and zero interest rate policy. They have very little internal entrepreneurial growth taking place. Then, if you looked at the news this morning coming out of Europe with the collapsing shares in Deutsche Bank, the European financial system is heading into another period of extreme financial stress.
I know you wouldn't want to use this term, but I think it's a no-brainer at this point to have an interprovincial pipeline going ahead, in one direction at least, to begin getting this resource to a coast. That gives you some much-needed economic opportunities coming forward.
Time is not on your side, though, in the sense that we've had a long stretch of very little Western economic growth. Looking forward, there are indications that not only is it not going to pick up but it's likely to get worse before it gets better.
Senator Eggleton: Just to clarify something on that point: How long do you think it would take, given the current processes at the NEB in their muddled form, before the government would even be in a position to make that kind of decision? And then how long would it take to build a pipeline after that? Are we looking at something that's five years down the road — 10 years down the road?
Mr. McKitrick: I don't know how long it would take to build an actual pipeline. It would depend on the route that was approved and the geography involved. We've already seen a case, though, where the NEB has approved a project, and it was approved by the government, and yet it still hasn't proceeded.
That's the sort of situation where, from an investor's point of view, if they can no longer trust that the procedure on paper that they followed in good faith doesn't actually lead to the outcome it was supposed to, then I would say that you tell me how long the approval process is going to take, because it's no longer what was on paper.
Senator Eggleton: I have a second question. These numbers you give about fuel consumption and particular emissions, et cetera, are impressive numbers. I think we all instinctively know there have been improvements in the engines of automobiles and other vehicles — that they are more efficient than they were before — but what about the increase in the volume from 1990 to 2014?
Mr. McKitrick: That goes on the benefits side. That means more people getting access to motor fuels and inexpensive forms of transportation. If those reductions in pollution had been brought about by a big drop in motor fuels consumption, then we would say that people had less access to fuels and were less able to use them. The fact that the two go together means that we have decoupled motor-vehicle transportation from urban air pollution in Canada. So you have a large increase in vehicle usage, more cars on the road, more miles being driven and a 40-per-cent increase in fuel consumption, but at the same time there's a large drop in total tailpipe emissions.
Senator Eggleton: Sure, but there are emissions, and you have many more vehicles than you had at the beginning of this data.
Mr. McKitrick: That's why I'm saying the fact that there are more cars, more fuel consumption — remember, that's beneficial to people. It gives them mobility and gives them the chance to go to places, get to jobs and all the things that people use their cars for. If, at the same time, we have a large drop in vehicle-related emissions, then we've decoupled the two trends.
Senator Eggleton: But, overall, you still have more emissions?
Mr. McKitrick: No, you have much lower emissions.
Senator Eggleton: No, but you have more vehicles. You haven't taken that into consideration, though.
Mr. McKitrick: You might have more congestion if you haven't been building enough roads for the vehicles, but you have lower emissions.
I'll just follow up on one point. You probably remember Toronto air in the 1960s and the 1970s. The earliest air pollution monitoring station in Toronto is at the corner of Bay and Wellesley. It's a record that goes back to 1962. Most of that data has never been published, but in the mid-1960s, sulphur dioxide in Toronto air was about 150 parts per billion. Today it's less than 4 parts per billion. Particulate concentrations around 1970 in Toronto would have been 150 micrograms per cubic metre. Today it would rarely get up to 30 micrograms per cubic metre.
So all of the increases in economic activity and all the people who have moved in — businesses, industries and all that — have happened at the same time as you've reduced air pollution in Toronto. You've got two good trends that way: You have more economic activity and more income generated, but you have cleaner air.
The Deputy Chair: Before we get to the second round, professor, I have a question for you.
You're an economics professor. It's been about 40 years since I took a few courses in economics, but there are a few principles I do remember, and one is the law of diminishing returns. I'm sure it's one you subscribe to, I would think.
You talk about carbon taxes and this overkill when it comes to regulation. One thing we've noticed — and I've been on this committee and the Energy Committee for five years — is that it seems politicians around the world have a propensity to run head-first, lemming-like, over the cliffs when it comes to taking assets and stranding them. I'm thinking of coal-fired generation and oil-fired generation.
I'd like your opinion on this. I'm not saying we should be building new coal-fired plants, but for example, we have a relatively brand new coal-fired plant in Alberta with about a 25- or 30-year lifespan. We have coal-fired plants in Nova Scotia that have relatively long lifespans. As you said, the Government of Nova Scotia has already included some of this stuff into their pricing.
Do you subscribe to the view that I subscribe to that there seems to be too much of a trend of running toward shutting down these fixed assets with the relative return in regard to the environmental impact not being worth the cost?
Mr. McKitrick: I've looked very closely at the Ontario decision. The Ontario government keeps referring to a cost-benefit analysis that was done in 2005. At the time of that study, they had completed retrofitting only four of the 12 coal-fired generating units; between Lambton and Nanticoke, there are 12 units.
The data showed from the retrofit that by installing the pollution-control equipment, they eliminated 95 per cent of the particulate emissions from the smokestacks and 70 per cent of the NOx emissions. When the engineering company that did the air quality simulations looked at it, they ran simulations of what would happen to air quality if we were to shut down the coal-fired plants. There were very small reductions in air pollution, because they weren't big contributors to Ontario air pollution. But they also looked at what would happen if we were to just finish the retrofit. You get the same reductions in air pollution, just by finishing the retrofit.
In fact, with the NOx, if you replace the coal-fired capacity with natural gas capacity, you get more NOx emissions because the natural gas plants had slightly higher emissions of NOx compared to the coal-fired plants. That was a case where they could have got the air quality improvements at a fraction of the cost simply by completing the retrofit that was already under way.
In the case of Alberta, it would be the same story. As you mentioned, there's some younger units out there that have a long lifespan. It's not just that the government has rushed to always be seen tightening the regulations, but they get into more dramatic gestures, like shutting down the coal-fired power plants rather than simply finishing what they'd already started, which was a major retrofit. Not cheap, but nothing compared to the cost of the Green Energy Act, but it would have given them the same benefits on air pollution reductions.
So it's both the tendency to overkill, but also the tendency to prefer dramatic gestures that aren't smart in the end.
Senator Mercer: I think you failed to take into account the political benefit that gets weighed in by politicians making decisions on the closing of coal-fired plants. That's a separate subject.
Senator MacDonald drew attention to the fact that you are an economist, and I think that's an important aspect that we need to talk about, because in the discussion about a free trade deal with China, if you were advising the Chinese government, it would seem to me that they would be keen on a free trade agreement, but they would also be keen on us being able to get our product from Alberta and Saskatchewan to tidewater. Would you not agree with that?
Mr. McKitrick: Yes. It's in their interest to see the global supply of petroleum increase because, other things being equal, that will push the world price down a little bit.
China, though, has access to oil anywhere in the world. I think for them perhaps an issue is the stability and security of the supply, and Canada would be an attractive supplier that way compared to some places in the Middle East.
I have no insight, to be honest, into the Chinese bargaining position, but for something like crude oil, there are a lot of suppliers out there. I don't think they would be too concerned if Canada never got its act together on this.
Senator Mercer: Well, I also noted that in your presentation you didn't take favour with either the western pipeline or Energy East. You showed no preference.
Senator MacDonald and I are on a bit of a mission, as we talk at all of these sessions, to make sure that people understand that Energy East, in our opinion, shouldn't end in Saint John, New Brunswick. It should end at the Strait of Canso in Nova Scotia. That's where the oil that we import comes into the country. We already have the large storage tanks to receive the oil. There's no reason why we can't store the product as we're preparing to export. It makes a lot of sense to continue the pipeline beyond the Irving refinery in Saint John to the Strait of Canso in Nova Scotia.
The vital point for all of those people who are opposed to pipelines is that that avoids building a terminal out in the very environmentally sensitive Bay of Fundy. The Strait of Canso is on the Atlantic Ocean. It already has a proven record of being able to ship product.
You made no comment about that. I'm just curious as to why no comment on either pipeline.
Mr. McKitrick: Well, I was told I only have seven minutes.
Senator Mercer: You're one of the first witnesses ever to pay attention to that.
Mr. McKitrick: No, I haven't expressed on opinion on that because I think once you get past the conceptual issue of are you going to get Alberta oil to tidewater, at that point it becomes a question for the engineers and accountants about which is the most cost-effective way to do it.
Now, it makes sense to exploit infrastructure that's already there rather than trying to build brand new infrastructure, so to that extent the twinning of an existing pipeline or the use of pipeline capacity that's already there, repurposed to another output, those are benefits that need to be taken into account. They may, in the end, not be decisive. It would depend on the specifics of the project.
Senator Mercer: Senator MacDonald always wants to point out the fact that we do already have a pipeline in Nova Scotia which is shipping natural gas from the Sable Island fields through to the United States, which is our main market, but he also points out the fact that we're probably going to run out of gas in 18 months. So if we have a pipeline that's there, we can use it.
The technology is beyond me, but somehow we reverse that. We're almost at the Strait of Canso as it is, and it already goes through New Brunswick to the American market, so twinning it, improving it, whatever they need to do, it follows exactly what our witness said is working with existing infrastructure.
[Translation]
Senator Boisvenu: I want to speak about the carbon tax. We know the government wants to encourage the provinces to apply the carbon tax. In your presentations, I noticed you're more inclined to attribute global warming to an earth cycle rather than to industrialization or the use of hydrocarbons.
What would be the point of a carbon tax if you don't attribute the increase in greenhouse gases to humans? Also, how would a carbon tax affect natural resource development in Canada?
[English]
Mr. McKitrick: I would correct you on the first point. I don't think I've ever written on climate cycles. That's a specific topic: Milankovitch cycles, solar cycles. I haven't written on that or tried to assess their role.
I have written on the assessment of models and their projections versus observations. There, the evidence from my own work, but also from a lot of other people, including the last Intergovernmental Panel on Climate Change report, is that models are currently overestimating the rate of warming across the board.
That goes to the assumption of, okay, there's an effect of greenhouse gases, but is it a weak effect or a strong effect? There, I would say, as you look at the Intergovernmental Panel on Climate Change report and also the extensive literature behind it, it's a very serious open question, and it has a huge effect on the economics.
At the end of this week, I will be making a presentation at the Canadian Resource and Environmental Economics Study Group. We meet every year. It's my colleagues in environmental economics. I will be presenting current work that I'm doing on what's called the social cost of carbon, the way to calculate the proper tax rate. When we put up-to-date data on climate sensitivity into the economic models — they are called integrated assessment models — the social cost of carbon estimate drops dramatically.
Even if you use the previous numbers, the carbon tax that comes out of an economic model isn't all that high compared to the cost of many of the policies that have already been put in place, but as we get more data, the social cost of carbon estimates, taking into account the up-to-date evidence on climate sensitivity, is certainly not going up. It is, more likely, going down.
Now, that is somewhat of an academic discussion. Most of the discussion around regulations, as far as I can tell, doesn't seem to take too much account of actual estimates of the social cost of carbon. If they did, there are a lot of regulations currently on the books that wouldn't have been approved because the marginal cost of the consumer is far above the cost of the carbon that they are meant to address. That's a larger discussion than one you're likely to want to get into, but it does go to the point that given the fact that we already have a lot of regulations that cost more than the likely benefits attached to them, adding a carbon tax on top of that of any kind just doesn't make any sense.
The Deputy Chair: Professor, I have a couple more questions, if you'll indulge me.
You've been quite active in publishing and responding to these concerns. You published an opinion piece in April 2016 suggesting there's no such thing as social licence and the continued pursuit of one is an act of utter folly for Alberta and Canada. I'd like you to elaborate on those views.
Mr. McKitrick: I first heard the term "social licence'' in Alberta. It was in a meeting where there were some government officials and academics, and it seemed to be a concern within the bureaucracy. I'd never heard the term before, and I didn't quite understand what they were talking about. But over time what's emerged is an idea that there's a kind of an informal approvals process out there and that certain groups have ownership of it, mainly environmental groups, but other allied groups too, and that they can be brought onside. They can issue this social licence if they get certain concessions.
If you try to nail down who exactly is the agency that issues a social licence, though, good luck. It doesn't seem to be an identifiable group of people, and the requirements for getting a social licence never seem to be clear. I think the experience of the Alberta government is instructive here, that they specifically undertook some fairly onerous regulatory initiatives with the expectation that opponents of resource development would be brought onside, and that didn't happen. As I mentioned, the premier brought in these measures and then wasn't even able to get her own party to back her on these issues.
It was in the aftermath of that that I wrote my column to challenge the whole concept of social licence. I think for the ordinary members of the public what's worrisome about the notion of social licence is that it's not really a democratic process. We have regulatory measures. We have laws in place so that if you want to build a pipeline, in this case, or any other type of public infrastructure, there are laws you have to follow, and any member of the public has a say in what the laws are. The regulatory approvals process that's overseen by Parliament ultimately is answerable to members of the public. But if we get into the social licensing approach, that seems to just be in the hands of whoever can shout the loudest and whoever's prepared to chain themselves to a fence post or shut down a committee hearing. It becomes a form of mob rule, as far as I can see. I think we should focus on ensuring the rule-making process that's established in law and answerable through Parliament to the public is the one that we want to have, and if applicants don't meet the test of that rule-making process, then they don't proceed. But if they do and they applied in good faith and did their homework, then they should be allowed to proceed. Then it's incumbent upon the government not to let the people who are going to shout the loudest and shut down the process have their way in the name of social licence.
The Deputy Chair: We have a bit of time left, so one more question for you, and it's about investor confidence in Alberta.
You co-authored a paper in January 2016 for the Fraser Institute about the fall of investor confidence in Alberta. I know there's a lot of money flooding out of Alberta. The article suggests that while some investors already have priced in concerns about oil transport and market access, investor confidence in the province is taking a serious hit. Can you expand on your conclusions about the decline of investor confidence in Alberta? What factors have influenced it, and what can be done about it?
Mr. McKitrick: That paper came about when I asked one of my PhD students at the University of Guelph to look at the stock market valuation of major oil and gas companies and oil service companies in Western Canada to see if decisions that have been made over the past few years regarding the approval of the Keystone XL pipeline and the Northern Gateway pipelines appeared to affect the stock market valuation of the companies. We expected to find a result. When the Obama administration turned down the Keystone XL pipeline, we thought that would take some value off those companies, but it turned out there was no effect on the stock market. These were non-events in the stock market, and that indicates that investors had already anticipated and priced in bad news. Yet, from a completely separate data set, the Fraser Institute's international survey of energy sector investors found that Alberta had dropped considerably in the rankings as a favourable place to invest.
So I co-authored with Ken Green of the Fraser Institute a short essay looking at what explains that, and we could say that it did not appear to be related to the market conditions because the evidence wasn't there from market valuation. From the investor responses, this appeared to be more a response to changing policy conditions and that the concern for Alberta should be that it's difficult to recover your reputation once you've signalled to the world you're not a good place to invest.
I think they will recover. It's certainly not a permanent issue, but the effect was very real in the survey of investor confidence of people around the world. They were looking at Alberta much less favourably now than they did a couple of years ago.
The Deputy Chair: Well, Dr. McKitrick, thank you very much for your presentation. It was a very clear-headed and informed discussion this morning.
Mr. McKitrick: My pleasure.
The Deputy Chair: Honourable senators, at tomorrow's meeting we will be beginning our discussion on the final report.
This meeting is adjourned.
(The committee adjourned.)