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Here's a Friday afternoon end of the week 
for ya about an issue we don't talk much about anymore:
Does it make sense for Canada fund the clean energy transition using oil and gas revenues? (I wrote an article that never came out about this topic, so here's my thoughts):
for ya about an issue we don't talk much about anymore:Does it make sense for Canada fund the clean energy transition using oil and gas revenues? (I wrote an article that never came out about this topic, so here's my thoughts):
This topic was all the rage in 2018. It was the primary justification behind the TMX purchase, a purchase that was justified in part as “a way to take revenues and invest them directly into natural climate solutions and clean energy projects” https://www.cbc.ca/news/politics/liberals-trans-mountain-pipeline-kinder-morgan-1.4681911
Putting aside the fiscal implications of nationalizing energy infrastructure, whether or it not was a smart investment, the emissions implications of the strategy, AND that two years later, taxpayers still own this loss leader – does that idea even make sense?
Is it possible for the federal government to take oil and gas revenues and direct them into clean energy investments? How would that work? What sorts of revenues exist here? And what are the options available to the feds to take this charming idea and put it into practice?
Here’s why this debate still matters: Even though O&G revenues aren’t growing, this is ultimately a question of fiscal stability. Money has to come from somewhere. If one sector needs more gov support while another raises less revenues, there’s a cash flow issue that arises.
So we still need to think about this politically charming idea. Where to start? Money has to come from somewhere. Three ways to do this: Raise more money through existing sources, redirect existing money you already have, or invest in new assets that generate revenue.
Oil and gas sales raise a few kinds of revenues: Resource royalties, corporate income tax, personal income tax, direct revenue from owned assets, carbon taxes on production/consumption, and (theoretically) export levies or tariffs. None of these are great options for the feds.
Resource royalties are under provincial control, so feds can’t spend those. Corporate/personal income tax is federally raised– it could be earmarked, and incoming revenues could be matched with outgoing spending on clean energy projects. But that assumes there are profits to tax.
Clean energy advocates shouldn’t be crazy about the idea of matching spending levels to declining FF revenues – it means we will invest less over time.
Even if the aim is to note it should be a minimum spending level, it’s going to be volatile bc production levels are determined by volatile commodity prices.
Earmarking is generally bad policy because it limits spending where it’s most useful.
Earmarking is generally bad policy because it limits spending where it’s most useful.
But earmarking to a declining and volatile revenue stream is not going to provide investor stability – and that’s essential for directing investment into capital with 30+ plus time horizons. That uncertainty might actually slow investment down, which is the opposite of a solution
What about raising direct revenues from owned assets? TMX raised revenues through corporate income taxes (and eventual sale of assets) that were set to be spent on clean energy.
But public ownership of energy assets is hardly ideal. https://liberal.ca/our-platform/clean-energy-transition/
But public ownership of energy assets is hardly ideal. https://liberal.ca/our-platform/clean-energy-transition/
Public ownership of FF infrastructure exaggerates existing market failures, extends lifespans of carbon-intensive systems, pushes project costs/risks on taxpayers- If the federal government fails to resell the pipeline/losses money on it, it also counts as a fossil fuel subsidy
None of those factors support an energy transition, given that they depress market-led forces and would probably slow change.
What if we redirected carbon pricing revenues towards clean energy? Well, for starters, that would weaken the case for the GGPPA in the SCC.
What if we redirected carbon pricing revenues towards clean energy? Well, for starters, that would weaken the case for the GGPPA in the SCC.
If you touch the revenue recycling mechanisms in the OBPS, there would be a host of new potential legal challenges. Weakening legal stability of carbon pricing system is also going to impede the implementation of the new plan to increase the price to $170/tonne by 2030
So it would actively impede climate progress. Not good.
Final option: The feds could legally impose export levies on oil and gas leaving CAD. That’s a terrible idea.
Final option: The feds could legally impose export levies on oil and gas leaving CAD. That’s a terrible idea.
Export levies run into all the revenue volatility constraints outlined for taxes above that would reduce investment attractiveness, would slow investment in ALL energy sources, and they are hella inefficient ways of raising revenues
The feds have no good options for using oil and gas revenues to fund clean energy projects. Every option would slow rates of clean energy investment, create market uncertainty, open up climate policies to legal challenges and would all be actively unhelpful in a move to net-zero.
If the feds did want to increase investment rates into clean energy, here are three dramatically better options:
Can we spend oil and gas revenues on the clean energy transition? Sure. But it’s expensive, it would be a lot of work, and it would be bad for oil and gas AND clean energy. Better to look rely on other capital to fund this transition. /fin
Huge shout out to @dion_jason, @andrew_leach and @MikePMoffatt in chatting with me for background research while I was writing this article. But all these points^ are attributable to me.
