Harnessing Market Mechanisms for Environmental Conservation in the Oil Industry

Climate and Energy Technology and Innovation

By Preston Manning

The following are excerpts from remarks made by Preston Manning to the Newfoundland and Labrador Environmental Industry Association (NEIA) on April 27th, 2015 in St. John’s. http://ecofiscal.ca/carbon-pricing/

Recently I was asked to be one of a number of advisors to what is called the Ecofiscal Commission – a group of twelve independent economists supported by a number of private foundations and companies. They have banded together for the express purpose of developing proposals to better integrate economic development and environmental conservation in Canada.

Like most of you we feel it is unhelpful to polarize over economic development versus environmental conservation. It shouldn’t be “either or” but “both and” because most Canadians want both. We want both the jobs, incomes, goods and services that economic development creates and we want a healthy environment particularly in the local communities where we live, work, and play.

In other words Canadians search for a “middle way” between economic and environmental extremes. This of course is very Canadian. (Why did the Canadian cross the road? To get to the middle).

Now broadly speaking there are two fundamentally different approaches that can be taken to achieve this integration:

  1. Approaches that involve substantial government intervention in the economy through the micro regulation of the production and consumption behaviors of individuals, households, businesses, and industries.
  1. Approaches which lean more heavily on market mechanisms – mechanisms for bringing resources to bear on demands using pricing signals and financial incentives – with governments focusing on providing a supportive framework (macro regulation).

The Ecofiscal Commission has chosen to take this second approach in proposing practical and effective ways and means of integrating economic development and environmental conservation.

So the question becomes, if you are interested in integrating petroleum development with environmental stewardship using pricing mechanisms, do you agree with this basic principle? That for every major energy development we should identify any negative environmental impacts, devise and undertake measures to avoid or mitigate those impacts over time, and ultimately incorporate the costs of those avoidance or mitigation measures into the price of the energy product.

Applied to the oil patch, this is the principle behind so called “carbon pricing.” Funds generated by the application of carbon pricing to the oil patch can be used in a variety of ways – some good and some bad.

If they just go into the “general revenue fund” of a government to be spent on whatever, carbon pricing could be rightly characterized as little more than a tax grab.

But if they are used to reduce other taxes paid by consumers, as in BC, the total tax load on those consumers is not increased and there is no tax grab. Or if they are used to reduce business taxes or returned to industry through an arms length Technology Fund (as occurs in part in Alberta) to finance innovative solutions to the environmental impacts we are trying to avoid or mitigate, they end up in the hands of private sector players who are responsible for both the impacts and the solutions desired.

The benefits of this approach are many. For the producers it blunts the criticism that the petroleum industry is not doing enough to mitigate the environmental impacts of its operations – one of the major criticisms holding up the development of Keystone, Gateway, and fracking activity. It also repositions environmental conservation expenditures more positively as investments that can actually improve the bottom line by expediting regulatory approvals, public acceptance, and market access.

Most importantly, for those of you who are in the business of developing and delivering goods and services that circumvent or mitigate the negative environmental impacts of oil and gas development, carbon pricing should provide an increased pool of funds to finance those activities and expand your businesses.

And of course for the public who demand both energy and environmental conservation, carbon pricing facilitates the provision of both.


On Public Cooperation

If we want to talk about integrating economic development and environmental conservation, we should start the discussion with the public on the economic side – acknowledging their demands and worries about jobs and incomes, which are acute right now, and then segue to the need for environmental conservation as well – rather than the other way around.

We need to choose our words carefully. For example, I have always thought that it was a mistake over a decade ago to introduce the concept of carbon pricing as a “carbon tax”. In this context, economists use the word tax as a means of internalizing an externality. But the public understands the word tax to mean the government simply reaching its hand into their pockets to take out money to fund its own bureaucratic operations and services. That’s why I prefer to use words like “carbon pricing” or “environmental levies” to describe the concept.

And thirdly, if one is dealing with an audience that is skeptical about “global warming” and the role of human generated greenhouse gas emissions in contributing to it, don’t start there. Start with some other environmental impact of petroleum development that needs to be addressed—like impacts on water, or the generation of industrial waste, or land disturbances—and discuss the need for financing the required avoidance and mitigation measures there through some sort of pricing system rather than piling regulation on regulation.


On Cooperation Between Industry and Government

Cooperation between government and industry should minimize shock and uncertainty. If a government is going to introduce some form of carbon pricing or a macro framework to facilitate a market for environmental goods and services, it should do so gradually and so as not to “shock the system (Rick George’s advice) and scare off investment in the sector. Canadians are “gradualists” – if you want us to go from A to C you need to show us B and give us time to adjust.

Governments and industry need to cooperate on timing. Don’t introduce major measures to integrate economic development and environmental conservation just before an election, because elections are usually polarizing not integrative exercises.

If we are going to introduce an environmental pricing system in a commodity sector – oil and gas, mining, forestry, agriculture, the fishery – it seems to me that the best time to do so is just when commodity prices are beginning to fall, so that the impact on consumers is less drastic and disruptive.


On Local Approaches

In the early days of the environmental movement there was a slogan that we should “Think global and act local”. But it seems to me with the benefit of hindsight that a wiser course is to think local, act local” and if enough of us do so it will add up to something global.

Why think and act local on integrating economic development and environmental conservation – on coming up with innovative solutions to particular environmental challenges? Because most of us live and work local, we experience our environment locally, and we generally innovate in the place where we are – locally.

For example, while there are certainly similarities between the western and east coast oil patches, there are major differences – especially on the geographic and environmental side.

You have offshore operations and (unless the San Andreas fault shifts and Banff becomes a port), Alberta doesn’t have off shore oil development. We have the oil sands in the middle of a boreal forest, the mining and extraction of which is fundamentally different in its environmental impacts than those of conventional oil and gas operations. The environment in which fracking occurs on the prairies is fundamentally different than the environment in which fracking would occur if it were permitted on your west coast.

There is real merit therefore in approaching the practical integration of economic development and environmental conservation by first thinking and acting locally – in the place where you are – and then expanding where appropriate to thinking and acting provincially, federally, internationally and globally – rather than the other way around.

That’s why the Ecofiscal Commission in its first research report is putting its emphasis on proposing carbon pricing at the provincial level – taking into account and adjusting to the different energy and environmental features and priorities of each province – with perhaps a federal coordinating role developing down the road if the provinces concur, rather than focusing, as so many others have, on the very difficult task of trying to achieve carbon pricing through national policies or international accords.


And so in conclusion, I wish you well in your future endeavors – in pursuing the integration of energy and environmental interests through cooperation, communication, and local solutions – to the benefit of Newfoundland and other parts of Canada where your example, solutions, and leadership will also be relevant and useful.

Your efforts and successes will never satisfy those who want resource development without regard to environmental impacts, or environmental conservation without regard to economic consequences.

But your efforts and successes should satisfy the vast majority of Newfoundlanders and Canadians who want both a healthy environment and economic growth.

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