Fraser Forum - July/August 2010

Fraser Forum A Fraser Institute review of public policy in Canada

ENERGY POLICY Highlights of the 2010 Petroleum Survey The trade-offs of wind power

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N

ow that July is here, we are in that lovely time of year known as the dog-days of summer. The days are long, the nights are warm, and the world seems just a bit more relaxed and carefree. It’s a great time to get outside, spend time with friends and family, and take a break from the routines of “normal” life.

Last summer, I spent a week camping in the Kootenays, a quiet and scenic area in the southeast corner of British Columbia. Tenting in the woods is certainly a break from what I would consider “normal.” No cell phone, no computer, no television—no electricity at all, save for the batteries in our flashlights.

It takes a few days to adjust to a power-less existence. You go to bed when the sun goes down, you put on extra layers when you get cold. It’s a nice change of pace, but I’m always happy to get back to civilization.

A trip like that one reminds me just how dependent we are on energy—and how fortunate we are to have access to so many different forms of energy. Oil, gas, coal, hydro, nuclear—these sources of power make the world as we know it possible.

Canada is home to vast stores of energy, much of which has yet to be developed. For example, as of January 2009, Canada had 178 billion barrels of proven oil reserves, second only to Saudi Arabia. In addition, Canada holds almost 10 billion tonnes of coal reserves and is the world’s second largest producer of hydroelectricity.

In an article in this issue of Fraser Forum, Diane Katz discusses the potential benefits of one of Canada’s abundant and still untapped energy sources: shale gas. The National Energy Board estimates Canada’s volume of shale gas, an “unconventional” natural gas, to be 1,000 trillion cubic feet. As drilling technologies continue to improve, shale gas may provide a reliable and affordable alternative to other power sources, including costly “green” sources.

Given the incredible potential of Canada’s energy reserves, it is important that we maintain the right regulatory regime to attract investment and development. In this respect, Canada is improving. For example, according to the Fraser Institute’s 2010 Global Petroleum Survey, every Canadian jurisdiction except Quebec saw an improvement in its investment climate compared to 2009 (“Highlights of the 2010 Global Petroleum Survey,” pg. 14). Yet Canada’s provinces and territories still have a long way to go: only one province, Manitoba, was ranked one of the 10 most attractive places for petroleum investment this year.

It is difficult to predict with certainty how Canada’s energy sector will evolve over time. No energy source is perfect—even so-called “green” energy sources involve trade-offs (“Birds, bats, and the tradeoffs of wind power,” pg. 10). But with the right policy environment, our energy sector will continue to flourish, producing benefits for Canadians for years to come.

Canada’s vast energy potential

Kristin Fryer (fraserforum@fraserinstitute.org)

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Fraser Forum July/August 2010

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Contents 8

Montreal’s water system

1

From the editor

4

Forum authors

5

Canadians celebrate Tax Freedom Day on June 5 Milagros Palacios and Niels Veldhuis This year, Tax Freedom Day in Canada arrived three days later than in 2009. The earliest provincial Tax Freedom Day fell on May 19 in Alberta, while the latest date fell on June 16 in Saskatchewan.

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Going down the tubes Jean-François Minardi Montreal’s water infrastructure is in an advanced state of disrepair. It’s time for the city to explore alternatives to the status quo, including private sector participation in water management and a pricing system that would reflect the real cost of water services.

Wind power

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Economic apocalypse? Hardly Charles Lammam and Niels Veldhuis The HST will improve BC’s investment climate, which will ultimately lead to higher rates of economic growth, more opportunities, and a higher standard of living for British Columbians.

26 2

Prescription drug spending

Fraser Forum July/August 2010

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ENERGY POLICY

Prescription drug spending in Canada and the United States Mark Rovere Government interference in Canada’s prescription drug market does not produce cost advantages for consumers. Instead, it leads to distortions that affect drug prices and supply.

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Birds, bats, and the trade-offs of wind power Diane Katz Even so-called “renewable” energy sources, such as wind power, require environmental trade-offs.

In fact, wind turbines kill thousands of birds and bats each year.

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Highlights of the 2010 Global Petroleum Survey Gerry Angevine For the second year in a row, Manitoba has been named the most attractive Canadian province for petroleum investment, according to the 2010 Global Petroleum Survey. Manitoba was the only Canadian jurisdiction to make it into the top 10— in North America and worldwide.

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Shale gas: a reliable and affordable alternative to costly “green” schemes Diane Katz The vast stores of shale gas buried below the surface of North America (and beyond) have the potential to dramatically alter both environmental politics and geopolitics.

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Fraser Forum July/August 2010

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Forum Authors

Gerry Angevine (gerry.angevine@fraserinstitute.org) is a

Senior Economist in the Fraser Institute’s Centre for Energy Studies. He holds a Ph.D. in economics from the University of Michigan.

Diane K atz (diane.katz@fra​serinstitute.org) is the Director of Risk, Environment, and Energy Policy Studies at the Fraser Institute. She has an M.A. from the University of Michigan.

Charles Lammam (charles.lam​mam@fraserinstitute.org) is

a Policy Analyst in the Fiscal Studies Department at the Fraser Institute. He is completing an M.A. in public policy at Simon Fraser University.

Jean-François Minardi (jean-francois.minardi@fraserinst

itute.org) is a Senior Policy Analyst, Québec et la Francophonie, at the Fraser Institute. He holds a Master’s degree in economics from the Université Paris XII.

Milagros Palacios (milagros.palacios@fraserinstitute.org) is a Senior Economist with the Fraser Institute’s Fiscal Studies Department. She holds an M.Sc. in economics from the University of Concepcion in Chile.

Mark Rovere (mark.rovere@fraserinstitute.org) is the Associate Director of the Health Policy Research Centre at the Fraser Institute. He holds an M.A. in political science from the University of Windsor.

Niels Veldhuis (niels.veldhuis@fraserinstitute.org) is the Director of Fiscal Studies and Vice President, Canadian Policy Research, at the Fraser Institute. He has an M.A. in economics from Simon Fraser University.

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Canadians celebrate Tax Freedom Day on June 5

Fotolia

Milagros Palacios and Niels Veldhuis

I

t is nearly impossible for ordinary Canadians to have a clear idea of how much tax they really pay. For example, while Canadians are painfully aware of sales taxes, calculating the total amount paid would require people to track all of their purchases over the course of a year. There are also many taxes of which Canadians are largely unaware because they are built into the price of goods and services. Such taxes include import duties, excise taxes on tobacco and alcohol, amusement taxes, and gas taxes. Most Canadians are unaware that they pay the employers’ portion of payroll taxes such as Employment Insurance and Canada Pension Plans premiums and other taxes levied on businesses. Though businesses pay these taxes directly, the cost of business taxation is ultimately passed on to ordinary Canadians.

The Fraser Institute annually calculates Tax Freedom Day in order to provide a comprehensive and easily understood indicator of the overall tax burden faced by the average Canadian family. This article summarizes our 2010 Tax Freedom Day report (Palacios and Veldhuis, 2010).

Tax Freedom Day 2010 Tax Freedom Day is the day in the year on which the average Canadian family has earned enough money to pay the taxes imposed on them by the three levels of government: federal, provincial, and local. Taxes used to compute Tax Freedom Day include income taxes, property taxes, sales taxes, profit taxes, health, social security, and employment taxes, import duties, license fees, taxes on the consumption of alcohol and tobacco, natural resource fees, fuel taxes, hospital taxes, and a host of other levies.

In 2010, Canadians started working for themselves on June 5 (table 1). That is, Canadians worked until June 4 to pay the total tax bill imposed on them by all levels of government. From June 5 to the end of the year, taxpayers can keep all the income they earn.

Canadians can calculate their personal Tax Freedom Day using the Fraser Institute’s Personal Tax Freedom Day Calculator at www.fraserinstitute.org.

A later Tax Freedom Day This year, Tax Freedom Day arrived three days later than in 2009 (June 2). The latest Tax Freedom Day in Canadian history occurred in 2000 and 2005, when it fell on June 23. From 2005 to 2009, Tax Freedom Day for the average Canadian family came earlier each year. In 2010, this trend reversed.

While recent Tax Freedom Days show a slight reduction in the tax burden, Tax Freedom Day this year is still over a month later than it was nearly 50 years ago. In 1961, the earliest year for which the calculation has been made, Tax Freedom Day fell on May 3.

The later arrival of Tax Freedom Day in 2010 is primarily due to Canada’s improving economy following the country’s emergence from the recession of 2008/2009.

When the economy recovers and incomes increase, a family’s tax burden also tends to increase, but to a greater extent than incomes. The accelerated increase in the tax burden relative to income is due to the progressive nature of the Canadian tax system. Progressivity means that as people earn more income, they pay proportionately more

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Fraser Forum July/August 2010

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Table 1: Tax Freedom Days* 1981

1985

1995re

2000re

2005re

2009re

2010pe

Newfoundland and Labrador

18 May

9 May

24 May

7 June

24 June

15 June

12 June

Prince Edward Island

6 May

7 June

22 May

8 June

13 June

23 May

26 May

Nova Scotia

11 May

17 May

31 May

12 June

20 June

28 May

4 June

New Brunswick

6 May

2 June

1 June

10 June

11 June

24 May

26 May

Quebec

7 June

17 June

9 June

3 July

30 June

4 June

7 June

Ontario

29 May

26 May

8 June

15 June

15 June

29 May

31 May

Manitoba

17 May

5 May

14 June

22 June

21 June

29 May

30 May

Saskatchewan

24 May

17 May

20 June

28 June

6 July

11 June

16 June

Alberta

30 May

22 May

2 June

18 June

14 June

16 May

19 May

British Columbia

9 June

16 June

12 June

24 June

25 June

2 June

5 June

Canada

30 May

6 June

11 June

23 June

23 June

2 June

5 June

Newfoundland and Labrador

17 May

8 May

23 May

6 June

16 June

25 May

21 May

Without natural resources Saskatchewan

15 May

9 May

13 June

17 June

23 June

5 June

7 June

Alberta

6 May

3 May

24 May

26 May

24 May

10 May

12 May

British Columbia

6 June

12 June

8 June

16 June

18 June

30 May

2 June

Canada

27 May

4 June

9 June

19 June

19 June

31 May

3 June

re = revised estimate; pe = preliminary estimate *Based on total taxes as a percentage of cash income for families with two or more individuals.

Source: The Fraser Institute’s Canadian Tax Simulator, 2010.

in taxes. This phenomenon is one of the reasons behind the later Tax Freedom Day in 2010.

The later Tax Freedom Day is also the result of other cyclically related tax increases that occur during an economic recovery. For example, household consumption increases during a recovery, resulting in an increase in sales and other consumption taxes that Canadian families pay. Business profits also increase during a recovery, which increases the profit taxes businesses pay. These kinds of tax changes occurred in reverse in 2008/2009 when the economy was in recession.

In addition, several provinces increased taxes in 2010, contributing to the later Tax Freedom Day. For example, Quebec increased several taxes (e.g., gas and mining taxes) and introduced a new health tax; British Columbia increased its health tax (Medical Service Plan premiums); Saskatchewan increased tobacco and alcohol taxes; Manitoba also increased its tobacco tax; and Nova Scotia increased income taxes and its sales tax rate.

As is the case every year, Tax Freedom Day calculations are based on forecasts of personal income and federal and provincial tax revenue. When final revenue numbers become available at the end of each fiscal year and personal income data are updated by Statistics Canada, we revise our Tax Freedom Day calculations for previous years.1 If federal and provincial revenue or personal

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income end up lower than currently projected, Tax Freedom Day could change once the 2010 preliminary Tax Freedom Day estimates are revised.

Tax Freedom Day by province While all Canadians face more or less the same federal tax bill, Tax Freedom Day for each province varies according to the extent of the provincially levied tax burden (table 1). This year, the earliest provincial Tax Freedom Day fell on May 19 in Alberta, while the latest date fell on June 16 in Saskatchewan.

This year, all of the Canadian provinces, except Newfoundland and Labrador, experienced a later Tax Freedom Day than last year, which means that most citizens are working more for the government and less for themselves and their families this year.

Because there is some debate as to whether natural resource royalties are actually a tax, we provide two sets of Tax Freedom Days for provinces with significant extraction of natural resources. If natural resource revenues are excluded, Tax Freedom Day arrives 22 days earlier in Newfoundland and Labrador, nine days earlier in Saskatchewan, seven days earlier in Alberta, and three days earlier in British Columbia (table 1).

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Table 2: Tax Freedom Days including government deficits, 2010, preliminary estimates Tax Freedom Day

Balanced Budget Tax Freedom Day

Total increase (days)

Federal increase

Provincial increase

Newfoundland and Labrador

12-Jun

29-Jun

17

13

4

Prince Edward Island

26-May

16-Jun

22

17

5

Nova Scotia

4-Jun

26-Jun

21

18

3

New Brunswick

26-May

26-Jun

30

17

13

Quebec

7-Jun

25-Jun

18

13

5

Ontario

31-May

3-Jul

33

18

15

Manitoba

30-May

22-Jun

23

18

5

Saskatchewan

16-Jun

4-Jul

18

16

2

Alberta

19-May

16-Jun

27

18

9

British Columbia

5-Jun

29-Jun

24

20

4

Canada

5-Jun

30-Jun

25

15

10

Note: Numbers may not add up due to rounding.

Source: Palacios and Veldhuis, 2010.

Balanced Budget Tax Freedom Day

Conclusion

Right now, Canadians may rightly be thinking about the economic and tax implications of the recent return to budget deficits. Indeed, all Canadian governments (federal and provincial) are forecasting budget deficits for 2010. The federal government has budgeted for a $49.2 billion deficit in 2010/2011, while the provinces are cumulatively forecasting deficits amounting to $31.7 billion (Palacios and Veldhuis, 2010).

But the fact is that today’s deficits must one day be paid for by taxes. Deficits should therefore be considered deferred taxation. For this reason, we also calculate a Balanced Budget Tax Freedom Day, the day on which average Canadians would start working for themselves if governments were obliged to cover current expenditures with current taxation and were not able to defer any of the tax burden by running a deficit.

Table 2 presents Balanced Budget Tax Freedom Days for Canada and the provinces. Balanced Budget Tax Freedom Day arrives on June 30, which means that the average Canadian family would have to work until June 29 to pay their tax bill if, instead of financing their expenditures through deficits, Canadian governments had to increase tax rates to balance their budgets. Balanced Budget Tax Freedom Day arrives 25 days later than Tax Freedom Day. Fifteen of the 25 days are due to the federal deficit and the remainder is due to provincial deficits. The latest Balanced Budget Tax Freedom Day will fall on July 4 in Saskatchewan, more than two weeks later than that province’s Tax Freedom Day.

The Canadian tax system is complex and there is no single number that can give us a complete idea of who pays how much. That said, Tax Freedom Day is the most comprehensive and easily understood indicator of the overall tax bill paid by the average Canadian family. In 2010, Canadians celebrate Tax Freedom Day on June 5, three days later than in 2009.

Note 1 For example, in our 2009 Tax Freedom Day report (Palacios and Veldhuis, 2009), we estimated that Tax Freedom Day for 2009 would fall on June 6. This year, we recalculated Tax Freedom Day for 2009 using updated provincial and federal budget numbers and updated data from Statistics Canada. Our revised calculations reveal that Tax Freedom Day in 2009 fell on June 2 (table 1).

References Palacios, Milagros, and Niels Veldhuis (2009). Canadians Celebrate Tax Freedom Day on June 6. Fraser Alert. Fraser Institute. <www.fraserinstitute.org>.

Palacios, Milagros, and Niels Veldhuis (2010). Canadians Celebrate Tax Freedom Day on June 5, 2010. Fraser Alert. Fraser Institute. <http://www.fraserinstitute.org/ researchandpublications/publications/7345.aspx>.

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Going down the tubes iStockphoto

Montreal needs to fix its water infrastructure—and fast

T

he City of Montreal’s water and wastewater infrastructure is in an advanced state of disrepair. The city loses 40% of its water each year—some 800,000 cubic meters—because of leaks and breaks in the water pipes (Champagne, 2009, Apr. 21; Ville de Montréal, 2009). To put this volume into perspective, the total daily water consumption of Paris (with a population of 2.2 million people) is 550,000 m3 per day (Eau de Paris, n.d.). The huge losses are the result of years of neglect in the maintenance and repair of water lines and the sewer system.

The repair and modernization of Montreal’s water network will require massive outlays, estimated at $4 billion over 20 years (Ville de Montréal, 2006a: 89). Some 67% of water lines will exceed their “useful lifespan” within the next two decades, while 33% have already done so.

Water treatment plants must also be upgraded (Ville de Montréal, 2006b: 3).

Thus far, the city has tried to solve the problem by maintaining its public monopoly over water management, raising taxes, increasing water tariffs, and depending on contributions from other levels of government. Yet there is no guarantee that sufficient public funds will be available or that infrastructure repairs will be made efficiently.

It’s time for the city to explore alternatives, including private sector participation in water management and a pricing system that would reflect the real cost of water services.1 These alternatives would help raise the revenues needed to upgrade the system and protect the City of Montreal from future fiscal shocks.

Currently, Montrealers are not billed directly for water; they pay for water services through property taxes.2 The water is priced at a fixed rate, independent of actual consumption and the cost of operating and maintaining

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Jean-François Minardi the water system. Such pricing promotes waste because users are not responsible for the actual cost of the resources they consume. Since water consumption is subsidized through municipal and provincial taxes and federal grants (Renzetti, 2009: 11), consumers have little incentive to conserve water.

To become viable, the Montreal water system must have pricing that will cover all costs, including costs related to operations and the long-term upkeep of the infrastructure. Proper pricing would ensure that the capital required to repair and upgrade water infrastructure and treatment plants would be available.

The participation of the private sector in water management in Montreal could also provide new sources of capital and efficiency improvements, which would result from competition among service providers (Renzetti and Dupont, 2004: 1874).

Throughout Quebec, water distribution is a public service managed by municipalities, which own the infrastructure. That infrastructure cannot be sold without modifying provincial law.3 Such reform seems unlikely at this time, but would arguably be the best alternative for Montreal. Nevertheless, under current laws, local officials may delegate operation of the system to private firms in the form of a concession contract.4 The choice of a private operator should be made through a competitive bidding process, under a transparent, open call for tender. Such a system would allow private firms to compete for the market (Wolff and Palaniappan, 2004: 2). This would introduce competition and thus efficiency into the provision of water services.

Even the participation of foreign firms could increase access to expertise and technical know-how and help prevent conflicts of interest.

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In such a system, the private sector would be answerable to provincial regulators, the public, municipal governments, and owners or shareholders. This accountability would enforce operating discipline and lead to improvements in service and water quality (Brubaker, 2008: 53).

The terms and conditions of a carefully designed contract with incentives to encourage good performance and penalize bad performance (Kitchen, 2006: 11), as well as clear dispute resolution procedures, would ensure that the winning bidder fulfilled all contractual obligations, particularly with respect to levels of investment, infrastructure maintenance, rates, water quality, and customer service.

Although the benefits of market mechanisms in the management of water are substantial and undeniable, the public remains skeptical. It is, therefore, essential to remind Quebecers that water is not free—its price is considerable once the costs of system operation, infrastructure maintenance, and modernization are taken into account. Water pricing reform and the participation of the private sector would help cover these costs far more efficiently than is now the case. Montrealers should seize this opportunity to improve their water system.

Notes 1 This would cover the provision, storage, and treatment of drinking water, its distribution (system of aqueducts), and the collection of wastewater (sewer system) and its treatment.

2 In Montreal, owners of non-residential buildings are billed for water consumed in excess of 100,000 cubic metres.

For example: Consumption Excess water (above 100,000 m3) Rate per cubic metre Price of water

150,000 cubic metres 50,000 cubic metres × $0.22 = $11,000

(Ville de Montréal, n.d.)

3 In Quebec, water services are managed by municipalities, which own the infrastructure. Consequently, as the Quebec government notes, “The municipalities do not have the power to sell off their infrastructures, but they can delegate to private enterprise a portion of their service management activities.

This delegation of water management services could include operation, maintenance, and the administration of public works.

Municipalities remain, however, responsible for the operation and performance of the infrastructure, notably with regard to their obligations vis-à-vis the government” (Quebec, 2009).

4 In a concession contract, the private operator is responsible, not only for operating the system and day-to-day maintenance, but also for infrastructure investments. The private operator is remunerated directly by customers through a fee fixed by

the concession contract. In this type of contract, the delegating community is often freed of all financial obligations. In exchange, it must agree to a long-term concession contract.

References Brubaker, Elizabeth (2008). Water and Wastewater in Canada: Tapping into Private-Sector Capital, Expertise, and Efficiencies. In Nicholas Schneider (ed.), A Breath of Fresh Air: The State of Environmental Policy in Canada (Fraser Institute): 48–61.

Champagne, Sara (2009, April 21). Les contacts étaient interdits. La Presse (Montreal).

Eau de Paris (n.d.). Eau de Paris en chiffres. <http://www. eaudeparis.fr/page/quisommesnous/entreprise/enchiff res?page_id=22>, as of January 14, 2010.

Kitchen, Harry (2006). A State of Disrepair: How to Fix the Financing of Municipal Infrastructure in Canada. Commentary No. 241. CD Howe Institute.

Quebec, Développement durable, Environnement et Parcs (2009). La gestion de l’eau au Québec. Government of Quebec. <http://www.mddep.gouv.qc.ca/eau/consultation/ themes3.htm>, as of September 21, 2009.

Renzetti, Steven (2009). Wave of the Future: The Case for Smarter Water Pricing. Commentary No. 281. CD Howe Institute.

Renzetti, Steven, and Diane Dupont (2004). The Performance of Municipal Water Utilities: Evidence on the Role of Ownership. Journal of Toxicology and Environmental Health 67, 20–22: 1861–78.

Ville de Montréal (n.d.). User Fees for Water and Solid Waste Services. Ville de Montréal. <http://ville.montreal. qc.ca/portal/page?_pageid=44,289391&_dad=portal&_ schema=PORTAL>, as of April 14, 2010.

Ville de Montréal (2006a). Fonds de l’eau. Budget 2006. Ville de Montréal. <http://tinyurl.com/29w72jd>, as of April 14, 2010.

Ville de Montréal (2006b). Direction du développement de la gestion de l’eau. Plan d’affaires 2006. Powerpoint presentation. Ville de Montréal. <http://tinyurl.com/2btlk6r> as of as of April 14, 2010.

Ville de Montréal (2009). Mesure de la consommation de l’eau et optimisation du réseau de distribution. Powerpoint presentation. Ville de Montréal. <http://pdf.cyberpresse.ca/ lapresse/presentationcompteurs.pdf>, as of April 14, 2010.

Wolff, Gary H., and Meena Palaniappan (2004). Public or Private Water Management? Cutting the Gordian Knot. Journal of Water Resources Planning and Management (January/February): 1–3. <http://www.pacinst.org/publications/ essays_and_opinion/public_or_private_editorial.pdf>, as of April 14, 2010.

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Forum Focus

ENERGY POLICY

Fotolia

Birds, bats, and the trade-offs of wind power

Diane K atz

O

utrage erupted worldwide in the spring of 2008 following the deaths of 1,606 ducks that alighted on a tailings pond1 in northern Alberta, leading to the criminal prosecution of Syncrude Canada Ltd., one of the largest producers of crude oil from Canada’s oil sands (Syncrude, n.d.). Yet the fact that a great many more birds and bats are routinely mangled by wind turbine blades at wind farms draws very little attention. This double standard highlights the widespread misperception that so-called “renewable” energy sources do not demand environmental trade-offs.

The latest proof that they do came to light in May with the release of a bird and bat monitoring report from Canada’s second-largest wind farm, the Wolfe Island EcoPower® Centre2 (OPA, 2010a). In the first eight months of operation, the centre reported 1,962 bird and bat deaths involving 33 bird species and five bat species3 (Stantec Consulting Ltd., 2010a, 2010b).

These findings were largely ignored by the same media outlets that for months featured front-page headlines about dead ducks. But as Michael Fry of the American Bird Conservancy notes, “Somebody has given the wind industry a get-out-of-jail-free card” (Bryce, 2009, Sep. 7).

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Indeed, it seems that the wind power industry enjoys a degree of political favour that would make most other energy executives green with envy. The province of Ontario, for example, requires utilities to purchase wind power at inflated rates (OPA, 2010b), while British Columbia has mandated an annual quota of electricity from “renewable” sources (BC Hydro, 2010).

The sprawling $475 million Wolfe Island facility is located in Frontenac Township, Ontario, a few kilometres offshore of Kingston. It features 86 wind turbine generators4 capable of producing 197.8 MW at full capacity5 (OPA, 2010a). Commercial operations there commenced on June 26, 2009, under an enviable 20-year “Renewable Energy Supply II Contract” with the Ontario Power Authority (TransAlta, 2010). The project is also subsidized through the federal ecoENERGY for Renewable Power program (Canadian Hydro Developers, Inc., 2009).

The monitoring at Wolfe Island is intended to gauge the effects of the wind turbine generators on bird and bat populations, as required under federal and provincial laws and regulations (Stantec Consulting Ltd., 2010a).

The first report, released in February, documented 45 bird fatalities and 45 bat fatalities during May 2009 and June 2009 (Stantec Consulting Ltd., 2010b). The second

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report, covering the six months between July 2009 and December 2009, documented 602 bird fatalities and 1,270 bat fatalities (Stantec Consulting Ltd., 2010a). Neither report noted significant effects on waterfowl beyond “avoidance behaviour” (Stantec Consulting Ltd., 2010a).

Lacking a full 12 months of data, the monitoring team has advised against comparing the Wolfe Island findings to studies undertaken elsewhere, noting that there are seasonal variations in bird migration patterns (Stantec Consulting Ltd., 2010a). But provincial officials certainly noticed the Wolfe Island numbers. In response to the May 2010 report, for example, Erin Cotnam of the Ontario Ministry of Natural Resources observed that the number of raptor and vulture fatalities—13 in the six-month period—were “among the highest” of any wind farm in the province (Cotnam, 2010). Environment Canada characterized the raptor fatalities as a “primary concern [that] merits continued, close monitoring” (Read, 2010).

Researchers have devised a number of theories about why birds, with superb vision, and bats, with biological sonar, so frequently collide with whirring blades that, at Wolfe Island, measure 45 metres in length atop masts rising 80 metres from the ground. For example, an optical analysis conducted for the US Department of

Energy cited a phenomenon known as “motion smear” or “motion blur”: As the eye approaches the rotating blades, the retinal image of the blade (which is the information that is transmitted to the animal’s brain) increases in velocity until it is moving so fast that the retina cannot keep up with it. At this point, the retinal image becomes a transparent blur that the bird probably interprets as a safe area to fly through, with disastrous consequences. (Hodos, 2003) As for bats, there is evidence that mating behaviour is a factor. Researcher Paul Cryan, writing for the Journal of Wildlife Management, suggests that bats mistake the turbines for the high trees they prefer for mating (Cryan, 2008). He notes that “tree bats collide with turbines while engaging in mating behaviours that center on the tallest trees in a landscape.” Others blame “barotrama,” i.e., internal hemorrhaging consistent with trauma from the sudden drop in air pressure at turbine blades (Science Daily, 2008, Aug. 28).

A variety of other factors affect collision risks, including weather conditions, topography, the height,

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length, and speed of the blades, and lighting that attracts nocturnal migrants (Kuvlesky et al., 2007). Not surprisingly, the worst conditions are found at one of the oldest and largest wind farms in North America: California’s Altamont Pass. A 2008 study estimated that 10,000 birds, including dozens of golden eagles and other protected species, are killed there every year (Altamont Pass Avian Monitoring Team, 2008), earning wind turbine generators the moniker “Cuisinarts of the Air.” Colliding with blades is hardly the only risk wind power poses to birds and bats. Researchers have also found that the construction of wind farms and associated infrastructure (e.g., buildings, roads, and electrical transmission lines) renders wide swaths of habitat less suitable for birds (Kuvlesky et al., 2007). Wind farms also require large plots of open land—an estimated 2.5 acres per turbine, on average (Taylor, 2004). As a result, a variety of wildlife are affected.

This is not to say that wind turbine generators should be eliminated. Indeed, proponents such as the Canadian Wind Energy Association stress that far more birds—tens of millions annually—are felled by cats, cars, and collisions with skyscrapers (Erickson, 2001).6 But if that is a sufficient defence, should not the wind farm lobby have flocked to defend Syncrude Canada Ltd. against prosecution for far fewer deaths than routinely occur at wind farms across the country?

There is no shortage of human ingenuity to solve the myriad challenges posed by wind power and other energy sources. But policy makers and the public should not take political rhetoric at face value and assume the inherent superiority of non-fossil fuel energy sources.

Ultimately, whether wind power is deemed “better” than other forms of energy is, at present, a political decision, not a scientific one. Opinions vary widely about the reliability of oil imports, the environmental impacts of fossil fuels, and the economics of energy subsidies and regulatory mandates.

But even if consensus were achieved tomorrow, sound policy could be crafted only by acknowledging the trade-offs inherent in the production of all types of power.

2 The largest is Melancthon Wind Farm, near Shelburne, Ontario, with a capacity of 199.5 MW (OPA, 2010a).

3 The total number of fatalities reported reflects data corrections for carcass removals by predators, detection errors by field personnel, and unsearched areas due to dense vegetation, high water, or other obstacles (Stantec Consulting Ltd., 2010a).

4 In the production of electricity, the wind turns turbine blades that power a generator, and that power is then channeled to a transformer, which converts the electricity to the proper voltage for distribution along the power grid.

5 The actual amount of power generated depends upon wind conditions. In general, wind speeds below 3.5 m/s are insufficient to generate power. Most wind farms operate at about 30% of capacity.

6 Of course, the large differences in fatalities from such sources relate to their ubiquity, i.e., millions of miles of roads, millions of commercial buildings, and millions of cats.

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Forum Focus

References

Notes

Altamont Pass Avian Monitoring Team (2008). Altamont Pass Wind Resource Area Bird Fatality Study. Prepared for the Alameda County Community Development Agency. <http://www.altamontsrc.org/alt_doc/m30_apwra_ monitoring_report_exec_sum.pdf>, as of June 13, 2010.

1 A tailings pond is the containment area where water used in bitumen processing is stored to allow residues to settle, facilitating water recycling.

BC Hydro (2010). Clean Power Call. <http://www.bchydro. com/planning _regulatory/acquiring _power/clean_ power_call.html?WT.mc_id=rd_cleanpowercall>. Last updated June 21, 2010.

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Bryce, Robert (2009, September 7). Windmills Are Killing Our Birds. Wall Street Journal. <http://online.wsj.com/ article/SB1000142405297020370660457437654330839904 8.html>, as of June 12, 2010.

Canadian Hydro Developers, Inc. (2009). Canadian Hydro Updates Wolfe Island Wind Project. News release (February 13). Marketwire. <http://www.marketwire.com/pressrelease/Canadian-Hydro-Updates-Wolfe-Island-WindProject-TSX-KHD-949570.htm>, as of June 13, 2010.

Cotnam, Erin (2010). Letter to Garry Perfect, Environmental Specialist, TransAlta, from Erin Cotnam, Ontario Ministry of Natural Resources, dated May 10, 2010. <http:// w w w.transalta.com/sites/default/files/Ministry-ofNatural-Resources-Comments-on-Post-ConstructionMonitoring-Report-July-December-2009.pdf>, as of June 12, 2010.

Cryan, Paul M. (2008). Mating Behavior as a Possible Cause of Bat Fatalities at Wind Turbines. Journal of Wildlife Management 72, 3: 845–49. <http://www.altamontsrc. org/alt_doc/mating_behavior_as_a_possible_cause_ of_bat_fatalities_at_wind_turbines_authored_by_ paul_m_cryan_published_by_the_journal_of_wildlife_ management_date_2008.pdf>, as of June 12, 2010.

Erickson, Wallace P., et al. (2001). Avian Collisions with Wind Turbines: A Summary of Existing Studies and Comparisons to Other Sources of Avian Collision Mortality in the United States. National Wind Coordinating Committee. <http:// www.altamontsrc.org/alt_doc/nwcc_avian_collisions_ summary_of_studies.pdf>, as of June 12, 2010.

Hodos, W. (2003). Minimization of Motion Smear: Reducing Avian Collisions with Wind Turbines. National Renewable Energy Laboratory, US Department of Energy. <http:// www.altamontsrc.org/alt_doc/hodos_minimization_of_ motion_smear_8_2003.pdf>, as of June 12, 2010.

Jones, Jeffrey (2010, April 23). Syncrude Faces MultimillionDollar Tailings Costs. Yahoo! Canada Finance. <http:// ca.news.finance.yahoo.com/s/23042010/6/financesyncrude-faces-multimillion-dollar-tailings-costs.html>, as of June 12, 2010.

Kuvlesky, Jr., William, et al. (2007). Wind Energy Development and Wildlife Conservation: Challenges and Opportunities. Journal of Wildlife Management 71, 8: 2487–98. <http://www.altamontsrc.org/alt_doc/r49_kuvelsky_et_ al_jwm_paper_2007.pdf>, as of June 12, 2010.

Ontario Power Authority [OPA] (2010a). Wind Power: Wolfe Island Wind Project (197.8 MW) - Wolfe Island.

OPA. <http://www.powerauthority.on.ca/Page.asp?

PageID=924&ContentID=5109>, as of June 13, 2010.

Ontario Power Authority [OPA] (2010b). What is the Feedin Tariff Program? OPA. <http://fit.powerauthority.on.ca/ Page.asp?PageID=1115&BL_WebsiteID=19>, as of June 21, 2010.

Read, Rob (2010). Letter to Julie Harris, Senior Environmental Assessment Officer, Natural Resources Canada, from Rob Read, Environment Assessment Officer, Environment Canada, dated May 3, 2010. <http://www.transalta.com/ sites/default/files/Environment-Canada-Comments-onWolfe-Island-Post-Construction%20Monitoring%20 Report-July-December-2009.pdf>, as of June 13, 2010.

Science Daily (2008, August 26). Why Wind Turbines Can Mean Death for Bats. Science Daily. <http://www. sciencedaily.com/releases/2008/08/080825132107.htm>, as of June 12, 2010.

Smallwood, K. Shawn, and Carl G. Thelander (2004). Developing Methods to Reduce Bird Mortality in the Altamont Pass Wind Resource Area. Prepared for the California Energy Commission. <http://www.altamontsrc.org/alt_ doc/cec_final_report_08_11_04.pdf>, as of June 12, 2010.

Stantec Consulting Ltd. (2010a). Wolfe Island EcoPower® Centre Post-Construction Follow-up Plan: Bird and Bat Resources. Monitoring Report No. 2. Prepared for TransAlta Corporation’s wholly owned subsidiary, Canadian Renewable Energy Corp. <http://www.transalta.com/sites/default/ files/Wolfe-Island-EcoPower-Centre-Post-ConstructionMonitoring-Report-July-December-2009.pdf>, as of June 12, 2010.

Stantec Consulting Ltd. (2010b). Wolfe Island EcoPower® Centre Post-Construction Follow-up Plan: Bird and Bat Resources. Monitoring Report No. 1. Prepared for Canadian Hydro Developers, Inc.’s wholly owned subsidiary, Canadian Renewable Energy Corporation. <http://www. transalta.com/sites/default/files/Wolfe-Island-EcoPowerCentre-Bird-and-Bat-monitoring%20report-2009-06. pdf>, as of June 12, 2010.

Syncrude (n.d.). About Syncrude. <http://www.syncrude.ca/ users/folder.asp?FolderID=5617>, as of June 21, 2010.

Taylor, James M. (2004). Enviro Group Sues Wind Farm to Stop Bird Deaths. Environment & Climate News (March). <http://www.heartland.org/Article.cfm?artId=14562>, as of June 13, 2010.

TransAlta (2010). Wolfe Island. TransAlta. <http://www. transalta.com/facilities/plants-operation/wolfe-island>, as of June 13, 2010. Last updated June 2, 2010.

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Highlights of the 2010 Global Petroleum Survey Gerry Angevine

F

or the second year in a row, Manitoba has been named the most attractive Canadian province for petroleum investment, according to the Fraser Institute’s Global Petroleum Survey 2010.

Manitoba was the only Canadian jurisdiction to make it into the top 10—in North America and worldwide. Across the border, South Dakota, Texas, and Illinois were rated the most attractive jurisdictions in the United States—and the world as a whole—for petroleum investment.

The petroleum survey identifies the provinces, states, and countries with the greatest barriers to investment in oil and gas exploration and production. The survey provides useful information for policy makers who are considering reforms that would improve the investment environment of their jurisdiction.

The 2010 survey was undertaken between February and April 2010.1 The names of potential respondents were taken from publicly available membership lists of trade associations. A number of Canadian trade commissioners abroad also

14

provided the names of companies and individuals in their host countries. In addition, some industry associations assisted by providing contact information for individuals with member companies. A total of 645 managers and executives from 364 upstream petroleum companies participated, providing sufficient data to evaluate 133 jurisdictions.2 The companies represented in the survey account for more than 60% of projected spending on petroleum exploration and production by international oil companies in 2009 (International Energy Agency, 2009).

The survey questionnaire provided a list of 144 jurisdictions that respondents could evaluate, including most Canadian provinces and territories, many US states (and the Atlantic, Pacific, Gulf Coast, and Alaska offshore regions), all seven Australian states and territories, the Australian offshore, the Timor Gap, and other countries with petroleum production capacity. Mexico and other countries where investment in upstream petroleum exploration and development is mostly

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confined to government-owned facilities, thereby eliminating or severely reducing opportunities for international oil companies, were excluded. Respondents were advised to complete the survey only with regard to jurisdictions with which they were familiar.

For each of 17 factors judged by the survey coordinators to be important determinants of investment decisions, respondents were asked to choose one of the following five responses as best describing each jurisdiction that they chose to evaluate: 1.

2.

3.

4.

Encourages investment Is not a deterrent to investment Is a mild deterrent to investment Is a strong deterrent to investment 5. Would not invest due to this criterion

The 17 factors that were evaluated for each jurisdiction can be found in table 1.

For each jurisdiction, scores were assigned to each factor

Table 1: 17 factors that influence company decisions to invest in various jurisdictions 1. Government royalty payments, production shares, and licensing fees 2. Taxation in general, including personal, corporate, payroll, and capital taxes, and the complexity of tax compliance 3. Uncertainty concerning the basis for and/or anticipated changes to environmental regulations 4. Uncertainty regarding the administration, interpretation, and enforcement of existing regulations, and concern with the frequency of changes to regulations 5. The cost of regulatory compliance in relation to applications, public hearings, etc.

6. Regulatory duplication and inconsistencies 7. Legal system fairness and efficiency 8. Uncertainty over what areas are to be protected as wilderness or parks, marine life preserves, or archeological sites 9. Socio-economic agreement/community development conditions, including local purchasing and processing requirements, and agreements for supplying local infrastructure 10. Trade barriers and restrictions on profit repatriation 11. Labour regulations, employment agreements, and local hiring requirements 12. Quality of infrastructure, including access to roads, power availability, etc.

13. Quality and ease of access to geological information 14. Labour availability and mobility 15. Disputed land claims 16. Political stability 17. Security of personnel and assets Source: Angevine and Cervantes, 2010.

according to the proportion of the three most negative kinds of responses (i.e., “mild” or “strong deterrent to investment” or “would not invest”) to the total number of responses. The greater the proportion of negative responses garnered by a jurisdiction for a given factor, the greater the barrier to investment that the factor was seen to pose. Jurisdictions with the lowest scores were assumed to pose fewer

investment barriers and, therefore, ranked higher in terms of their attractiveness for investment.

The comparisons discussed in this article are based on index values derived by averaging the scores earned by each jurisdiction for each of the 17 factors. This “All-Inclusive Index” provides a comprehensive tally of the investment barriers within each jurisdiction. The complete results of the Global Petroleum

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Survey 2010 are available at www. fraserinstitute.org.

Results for Canada and the United States A total of 38 North American jurisdictions were ranked this year—28 American and 10 Canadian. This is five fewer than in 2009 when we had sufficient data to rank 43 jurisdictions—32 American and 11 Canadian. Table 2 provides the 2010 and 2009 scores for the 38 jurisdictions in order of their 2010 ranking.

One Canadian jurisdiction, Manitoba, ranked among the top 10 jurisdictions both in North America and worldwide this year; none did so last year. The nine other Canadian jurisdictions were among the bottom two-thirds of the 38 North American jurisdictions.

In addition to Manitoba, all of the other Canadian jurisdictions that were evaluated this year, except Quebec, improved in the overall rankings (of 133 jurisdictions), relative to their rankings last year (when 143 jurisdictions were rated).

Alberta’s score (table 2) is based on data gathered after the provincial government’s announcement on March 11, 2010, that it is planning to lower oil and gas royalties substantially at the beginning of 2011.

Alberta’s score this year is obviously an improvement over their score last year. That the province did not move up further in the rankings suggests that the New Royalty Framework, which came into effect on January 1, 2009, and subsequent adjustments,3 may have damaged Alberta’s attractiveness as a reliable place in which to invest. Moreover, the full details of the planned royalty reductions that were announced in March, as

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Table 2: Canada-US All-Inclusive scores and rankings, 2009, 2010 Jurisdiction

2010 Score

2009 Score

2010 Rank 2009 Rank Change (of 133) (of 143) in score

1 South Dakota

8.8

10.9

1

2 Texas

9.5

11.0

3 Illinois

9.7

15.3

4 Wyoming

10.3

5 Mississippi

11.6

7

2.1

2

8

1.4

3

12

5.6

17.4

4

16

7.1

9.9

6

5

-1.8

6 Utah

12.0

15.5

7

13

3.4

7 Manitoba

12.5

21.0

8

21

8.5

8 Oklahoma

13.0

11.3

9

9

-1.7

9 Alabama

13.4

8.9

10

2

-4.5

10 Offshore–Gulf of Mexico

13.4

16.0

11

14

2.5

11 Ohio

13.8

24.1

12

36

10.3

12 Arkansas

15.6

6.7

13

1

-8.9

13 Louisiana

16.6

16.2

15

15

-0.4

14 Saskatchewan

17.6

25.0

17

38

7.4

15 Kansas

18.8

8.9

19

3

-9.9

16 North Dakota

19.6

22.4

24

28

2.7

17 Ontario

21.2

33.3

28

60

12.1

18 Montana

24.3

25.7

35

41

1.5

19 Yukon

25.5

54.0

36

105

28.5

20 Michigan

27.3

21.0

38

22

-6.3

21 West Virginia

31.9

32.3

49

58

0.4

22 Nfld & Labrador

32.4

40.9

50

82

8.5

23 British Columbia

33.2

37.7

52

71

4.5

24 Nova Scotia

33.3

30.4

53

54

-2.9

25 New Mexico

34.3

26.8

54

43

-7.5

26 Offshore–Alaska

36.2

37.9

57

72

1.7

27 Alberta

36.7

47.5

60

92

10.8

28 Colorado

37.3

40.4

61

81

3.1

29 Kentucky

40.3

21.7

65

26

-18.7

30 Pennsylvania

40.4

29.6

66

51

-10.9

31 Alaska

41.8

39.7

68

78

-2.1

32 Offshore–Atlantic

42.4

29.8

71

53

-12.6

33 NW Territories

44.1

62.8

74

120

18.8

34 Quebec

44.9

36.9

77

68

-8.0

35 California

49.3

40.1

87

79

-9.2

36 Florida

57.9

N/A

100

N/A

N/A

37 New York

59.3

22.7

102

29

-36.6

38 Offshore–Pacific

60.7

23.6

103

33

-37.1

Source: Angevine and Cervantes, 2010.

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well as information on royalty changes to encourage investment in unconventional natural gas supplies (e.g., gas from shale formations and coal seams) and deep and horizontal drilling, were not made available until after the survey had been completed.

A second Alberta 2010 score (not included in table 2), one based on survey responses received this year but prior to the government’s March announcement, also shows an improvement in Alberta’s ranking since last year. This improvement was largely the result of improved marks for the province’s fiscal regime, which suggests that the royalty changes were widely anticipated.

Both Quebec and Nova Scotia lost favour with investors this year, as indicated by their higher scores. However, only Quebec slipped in the rankings, ranking last among the 10 Canadian jurisdictions evaluated and 34th of the 38 Canadian and US jurisdictions that were rated.

The only North American jurisdictions considered to be less attractive than Quebec for petroleum exploration and development investment were California, Florida, New York State, and the US Pacific Offshore. New York State’s score fell considerably, probably as a result of investor concerns regarding restrictions on drilling for shale gas. The three other jurisdictions in this group have been hit hard by investor hesitation on account of uncertainty regarding offshore drilling regulations.

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Eight of the nine American states and offshore regions ranking among the 10 most attractive Canadian and American jurisdictions (South Dakota, Texas, Illinois, Wyoming, Mississippi, Utah, Oklahoma, and Alabama) were also among the 10 highest ranked jurisdictions in the world this year. Only five US jurisdictions that made it into the top 10 this year were also there in 2009.

The US jurisdictions that improved their scores the most this year were Ohio and Wyoming.

Conversely, the US jurisdictions that experienced the most significant drop in their scores were the US Pacific Offshore, New York State, and Kentucky. The US Atlantic Offshore, Pennsylvania, Kansas, California, Arkansas, and New Mexico also lost considerable favour among investors.

Performance relative to other world regions In order to provide further insight into the performance of various jurisdictions, their scores were

segmented according to the quintiles (five groups) into which they fell. Those with scores in the zero to 19.9 range (the 1st quintile) were assumed to be the most attractive jurisdictions in the eyes of the survey respondents, while those with scores in the 5th quintile were judged to be the least attractive to investors.

Of the 24 jurisdictions in the world with 1st quintile scores this year, 14 were in the United States.

The others were Austria, five Australian jurisdictions, New Zealand, two Canadian provinces (Manitoba and Saskatchewan), and Chile. By way of comparison, in 2009 only 19 jurisdictions achieved 1st quintile scores—15 of which were in the United States. The other jurisdictions in this quintile in 2009 were Austria, South Australia, the Netherlands – North Sea, and Namibia.

Clearly, the 1st quintile performance gains this year were not in the United States, but in Australia, New Zealand, and Canada.

Thirty-nine jurisdictions had scores in the fairly attractive 2nd quintile range this year, including six American and six Canadian jurisdictions. In 2009, 59 jurisdictions were in 2nd quintile, of which 14 were US jurisdictions and six were Canadian.

Although four fewer US jurisdictions were evaluated this year, seven US states and offshore regions achieved mediocre 3rd quintile status in 2010 (of a group of 39), compared with only two (of a group of 36) in 2009. Two Canadian jurisdictions fell in the 3rd quintile this year, compared with three in 2009.

Together, Canadian and American jurisdictions comprised 23% of the jurisdictions with 3rd quintile scores in 2010, compared with only 14% a year ago.

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As in 2009, this year only a very small proportion of Canadian and US jurisdictions had scores in the unattractive 4th quintile. Only one North American jurisdiction (US Offshore – Pacific) had a 4th quintile score this year (of a group of 21); two jurisdictions, both Canadian, fell into the 4th quintile (of a group of 24) last year. Since the survey’s inception, no Canadian or US jurisdiction has been considered so unattractive for investment that it has scored in the 5th quintile.

While North American jurisdictions continue to perform favourably relative to much of the rest of the world, there has been some deterioration in the attractiveness of the region as a whole, as evidenced by the increased proportion of Canadian and US jurisdictions scoring in the 3rd quintile. This decline appears to be the result of growing concerns and uncertainty over environmental regulations.

Such concerns are not as evident in Australia and New Zealand, where all of the jurisdictions improved their scores this year, falling into the 1st or 2nd quintile.

Policy implications Policy makers in jurisdictions with relatively unattractive scores (such as the Northwest Territories, Quebec, California, Florida, New York State, and the US Offshore – Pacific) and in jurisdictions whose scores have dropped significantly, but are not included in that group (such as the US Atlantic Offshore, Kentucky, and Pennsylvania), need to be aware of the fact that investors are questioning the wisdom of investing in the their continued on page 25

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ENERGY POLICY

Shale gas

Energy Information Administration; Fotolia

A reliable and affordable alternative to costly “green” schemes

Diane K atz

G

overnments at every level across North America are collectively showering billions of tax dollars on “green energy” schemes in an effort to avert global warming and end our “dependence on foreign oil.” But in the political arena, there is precious little attention being paid to a far more affordable alternative energy source with great potential to reduce both fossil fuel emissions and imports of Middle Eastern oil.

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In contrast to government tax breaks, preferential loans, grants, and other forms of subsidies to wind and solar projects, private investors are moving capital into the production of “shale gas.”1 Trapped within dense sedimentary rock, this “unconventional”2 natural gas was for decades considered too costly to retrieve. But advances in drilling technologies, along with the rising cost of conventional natural gas, have transformed the economics of

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shale gas extraction. Consequently, the vast stores of shale gas buried a thousand metres or more below the surface of North America (and beyond) have the potential to dramatically alter both environmental politics and geopolitics.

The actual volume of recoverable shale gas remains imprecise as supplies are still being mapped and evaluated. The National Energy Board estimates Canada’s volume to be 1,000 trillion cubic feet,3 with similar reserves in the United States (National Energy Board, 2009). Europe also may be home to nearly 200 trillion cubic feet of shale gas (Jaffe, 2010, May 10).

In Canada, there are major shale gas “plays” in the Horn River Basin and the Montney Formation, both in British Columbia. Major exploration for shale gas is also occurring in the Colorado Group in Alberta and Saskatchewan, the Utica Shale in Quebec, and the Horton Bluff Shale in New Brunswick and Nova Scotia (National Energy Board, 2009).

When burned, shale gas emits just half the carbon dioxide of coal (Natural Gas Supply Association, n.d.).4 Unlike wind and solar power, which produce power intermittently, natural gas is continuously available to produce the steam that powers turbines in the production of electricity. In addition, distribution networks for natural gas already exist, meaning that there is less need to build costly infrastructure.5 These and other advantages of shale gas call into question the massive public outlays for more problematic “renewable” power sources.

According to energy analyst Amy Myers Jaffe, shale gas “is likely to upend the economics of renewable energy. It may be a lot harder

to persuade people to adopt green power that needs heavy subsidies when there’s a cheap, plentiful fuel out there that’s a lot cleaner than coal, even if [natural] gas isn’t as politically popular as wind or solar” (Jaffe, 2010, May 10).

That very dynamic stymied energy mogul T. Boone Pickens in his plan to build the world’s largest wind farm in the Texas Panhandle.

The plan called for the construction of a wind farm with 687 turbines, driving the production of 1,000 megawatts of electricity—the equivalent of a nuclear power plant (Souder, 2009, July 6).

Shortly after the debut of the project in 2008, natural gas prices declined, making wind energy not competitive enough to attract the $2 billion needed in financing (Souder, 2009, July 6). As Pickens told the Dallas Morning News, “You had them standing in line to finance you when natural gas was $9 [per million Btu] … Natural gas at $4 [per million Btu] doesn’t have many people trying to finance you” (Souder, 2009, July 6). The lack of a transmission line to move the wind power to urban centers also contributed to his decision to kill the project, Pickens said (Souder, 2009, July 6).

But governments across Canada have virtually unlimited financing at their disposal in the form of tax revenues, and thus are forcing taxpayers to subsidize costly “renewable” energy projects and transmission build-outs, even though more efficient alternatives exist. The government of Ontario, for example, is forcing utilities (read consumers) to buy “green” power at more than double the market rate for conventional electricity (Ontario Power Authority, 2010).

In the past, the fine grain of shale rock made tapping the natural gas within particularly difficult.

The National Energy Board (2009) describes shale as “denser than concrete” and thus virtually impermeable. But from the tenacity of a lone Texan, a productive method to set the gas flowing has emerged. As the Sunday Times reports: It all began in 1981 when Mitchell Energy & Development, a Texas gas producer, was, quite literally, running out of gas. [George] Mitchell, who founded the firm, ordered his engineers to look into tapping shale, which drillers usually passed through to get to the oil and gas fields below them …

For years, [the shale] had been ignored, but Mitchell had a hunch about their potential. “I thought there had to be a way to get at it,” he said. “My engineers were always adamant. They would say, ‘Mitchell, you’re wasting your money.’ And I said, ‘Let me.’” It took 12 years, more than 30 experimental wells and millions of dollars before he came up with the technical solution.

That technical solution is known as “hydraulic fracturing” (or “fracking”), which involves injecting at high pressure a mixture of water, sand, and chemicals into the shale to fracture the rock and allow the release of the natural gas therein. In conjunction with fracking, horizontal drilling is used to maximize the surface area of the borehole through which the gas is collected (CSUG, n.d.).

Some environmentalists complain that the chemical compounds used in fracking threaten to pollute soil and groundwater, and they decry

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the volumes of water used in the production process (Campbell, 2010).

In addition, some global warming alarmists oppose the development of new stores of fossil fuel. But in many instances, fracking is conducted thousands of feet below aquifers, and the strata are separated by millions of tons of impermeable rock (Energy in Depth, 2010). Moreover, ever larger quantities of the water used in fracking are recycled. The industry also maintains that stringent regulatory standards are in place to protect the environment (American Petroleum Institute, n.d.). And, as detailed in another article in this edition of Fraser Forum (“Birds, bats, and the trade-offs of wind power,” pg. 10), all sources of energy—“renewables” included—involve environmental trade-offs.

Initially, fracking and horizontal drilling were too costly for widespread adoption. But as oil prices rose, these techniques became more costeffective. Since then, economies of scale and technological innovations have “halved the production costs of shale gas, making it cheaper even than some conventional sources” (The Economist, 2010, Mar. 11).

Energy analysts expect further cost reductions in shale gas production as major oil and gas companies invest in new technologies. For example, production costs have fallen to $3 per million Btu at the Haynesville Formation, which encompasses much of the US Gulf Coast, down from $5 or more at the Barnett Shale in the 1990s (Jaffe, 2010, May 10).

The turnabout in shale gas fortunes is all the more remarkable given predictions in the past decade that Canada and the United States were running low on natural gas (Energy Information

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Administration, 2003). US Federal Reserve Chairman Alan Greenspan, for example, declared in 2003 that the United States would have to import liquid natural gas to meet demand (Fine, 2010).

Doing so would have increased reliance on supplies from Russia and Iran, hardly an appealing prospect for anyone intent on “energy independence.” Before the shale gas boom, both countries were thought to control more than half of the known conventional gas reserves in the world (Energy Information Administration, 2010b). Now, however, Canada and the United States have access to huge domestic stores.

This could cause dramatic shifts in global petro-politics. As energy analyst Amy Myers Jaffe notes, “Consuming nations throughout Europe and Asia will be able to turn to major US oil companies and their own shale rock for cheap natural gas, and tell the Chavezes and Putins of the world where to stick their supplies—back in the ground” (Jaffe, 2010, May 10).

The new accessibility to shale gas will also moderate the influence of OPEC and any potential natural gas cartel by providing affordable and reliable alternative sources of energy. Indeed, US production of natural gas in March hit an historical monthly high of 2.31 trillion cubic feet, topping Russia to become the largest producer in the world (Energy Information Administration, 2009). Consequently, natural gas exports once headed to North America are instead heading to Europe, thereby forcing Russia to lower prices for its once-captive customers (Fine, 2010).

Illustrating the new political tectonics is the recent agreement

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ENERGY POLICY

between Chevron and Poland for natural gas development and production. According to Dr. Daniel Fine of the Mining and Minerals Resources Institute at MIT, “When Chevron announces that they have gas [in Poland], then Russia is shut out” from having a monopoly in Eastern Europe (Fine, 2010).

Canada will also feel the effects of the energy market shifts. For example, the expansion of US supplies6 means that Canada will need to find new export opportunities for its natural gas. However, this should not cause problems, analysts say, because supplies of conventional natural gas are declining elsewhere while fuel demands for transportation and electricity are growing (Welsch, 2010, Feb. 23).

The private sector is adept at adjusting to shifting trends. For example, a shipping terminal for natural gas imports to be built by Kitimat LNG Inc. was redesigned for exports to the Pacific Rim due to “increases in supply throughout North America—including in the US, Canada’s traditional export market” (Kitimat LNG Inc., 2008).

Unfortunately, federal and provincial governments remain wedded to energy policies that lack the knowledge and wisdom of private investors and fail to account for the dynamic nature of the market.

Vast infusions of subsidies obscure the true costs of various energy sources, while disparate regulations and mandates inhibit the unfettered competition that would otherwise determine the most efficient and beneficial fuels. Policy makers and politicians could dramatically improve energy policy by releasing their ham-fisted grip on the energy market.

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Notes 1 A provincial auction of land for shale gas exploration recently netted British Columbia more than $404 million—nearly twice the amount officials expected—making it one of the largest single land auctions in Canadian history.

2 Shale gas is categorized as “unconventional” because stimulation techniques are required to release the gas for retrieval (CSUG, n.d.).

3 One cubic foot of shale gas is equivalent to 1028 British thermal units (Btu).

A Btu represents the heat content of a fuel. A single Btu is the quantity of heat required to raise the temperature of one pound of liquid water by 1o Fahrenheit at the temperature that water has its greatest density (approximately 39 o Fahrenheit).

4 Levels of CO2 emissions are considered important by those who are convinced that human-made emissions of carbon dioxide cause global warming. Currently, however, there is no credible evidence to support that hypothesis.

5 The service infrastructure established for conventional gas reservoirs could be used for shale gas with minimal changes (Canadian Centre for Energy, n.d.).

6 Estimates of shale gas resources have increased total US natural gas reserves by almost 50% in the past decade (Energy Information Administration, 2010a).

References American Petroleum Institute [API] (2009). US Oil Shale: Protecting Our Environment. API. <http://www. api.org/aboutoilgas/oilshale/upload/Oil_Shale_Factsheet_2.pdf>, as of June 23, 2010.

Brown, Stephen P.A., Steven A. Gabriel, and Ruud Egging (2010). Abundant Shale Gas Resources: Some Implications for Energy Policy. Resources for the Future. <http://www.rff. org/RFF/Documents/RFF-BCKBrownetal-ShaleGas.pdf>, as of June 2, 2010.

Cambridge Energy Research Associates (2010). IHS CERA: Shale Gas Can Be a “Game Changer” for North America’s Energy Future. News release (March 10). <http://press.ihs. com/article_display.cfm?article_ id=4211> as of June 2, 2010.

Campbell, Jon (2010, May 25). Environmental, Gas Groups Spar Over Marcellus Shale Drilling. PressConnects.com. <http://www.pressconnects.com/article/20100525/NEWS 01/5250374/Environmental-gasgroups-spar-over-Marcellus-Shaledrilling>, as of June 23, 2010.

Canadian Centre for Energy (n.d.).

Why is Unconventional Natural Gas Important? Canadian Centre for Energy. <http://www.centreforenergy.com/AboutEnergy/ONG/ UNG/Overview.asp?page=3>, as of June 9, 2010.

Canadian Society for Unconventional Gas [CSUG] (n.d.). UG Facts: Shale Gas. CSUG. <http://csug.com/index. php?option=com_content&task=v iew&id=60&Itemid=66#shale>, as of June 9, 2010.

The Economist (2010, March 11). An Unconventional Glut. <http:// w w w.economist.com/businessfinance/displaystory.cfm?story_ id=15661889>, as of June 9, 2010.

Energy in Depth (2010). Debunking GasLand. Energy in Depth. <http:// www.energyindepth.org/2010/06/ debunking-gasland/>, as of June 23, 2010.

Energy Information Administration (2003). Annual Energy Outlook 2003

with Projections to 2025. Government of the United States. <http:// w w w.eia.doe.gov/oia f/archive/ aeo03/index.html>, as of June 21, 2010.

Energy Information Administration (2007). Analysis of Alternative Extensions of the Existing Production Tax Credit for Wind Generator.

Government of the United States. <http://www.eia.doe.gov/oiaf/serv icerpt/ptc/>, as of June 22, 2010.

Energy Information Administration (2009). Shale Gas Proved Reserves.

Government of the United States. <http://tonto.eia.doe.gov/dnav/ng/ ng_enr_shalegas_s1_a.htm>, as of June 5, 2010.

Energy Information Administration (2010a). International Energy Outlook 2010: Highlights. Government of the United States. <http://www. eia.doe.gov/oiaf/ieo/pdf/highlights. pdf>, as of June 1, 2010.

Energy Information Administration (2010b). Country Analysis Briefs: Iran: Natural Gas. Government of the United States. <http://www.eia. doe.gov/emeu/cabs/Iran/NaturalGas.html>, as of June 21, 2010.

Fernando, Vincent (2010, February 24). America’s Massive Shale Gas Revolution Hits Canada Threatening LNG Glut. Business Insider. <http://www.businessinsider.com/ americas-massive-shale-gas-revolution-hits-canada-2010-2>, as of June 1, 2010.

Fine, Daniel (2010). The Impact of Shale Gas Technology on Geopolitics. The Fletcher School, Tufts University. <http://fletcher.tufts.edu/ news/2010/04/features/fine.shtml>, as of June 1, 2010.

Fortson, Danny (2010, June 6). The Scramble for Shale Gas. Sunday Times (UK). <http://business.time-

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sonline.co.uk/tol/business/industry_sectors/utilities/article7144735. ece>, as of June 9, 2010.

Hamilton, Tyler (2010, March 20).

Alberta Firm Eyes Ontario’s Untapped Shale Gas. Toronto Star. <http://www.thestar.com/business/ article/782552--alberta-firm-eyesontario-s-untapped-shale-gas>, as of June 1, 2010.

Heffernan, Kevin (2008). Shale Gas in North America: Emerging Supply Opportunities, Powerpoint presentation. Canadian Society for Unconventional Gas. <http://www. neca news.org /dev/docu ments/ 080924heffernan_kevin_1.pdf>, as of June 1, 2010.

Jaffe, Amy Myers (2010, May 10). Shale Gas Will Rock the World. Wall Street Journal. <http://online.wsj. com/article_email/SB10001424 05270230349130457518788059 6301668-lMyQjAxMTAwMDEwM TExNDEyWj.html>, as of May 28, 2010.

Kitimat LNG Inc. (2008). Kitimat LNG Plans Liquefied Natural Gas Export Terminal to Meet Growing Demand in Asia. News release (September 19). <http://www.kitimatlng.com/ code/navigate.asp?Id=73>, as of June 9, 2010.

National Energy Board (2009). Understanding Canadian Shale Gas - Energy Brief. Government of Canada. <http://w w w.neb.gc.ca/clf-nsi/ rnrgynfmtn/nrgyrprt/ntrlgs/prm rndrstndngshlgs2009/prmrndrs tndngshlgs2009nrgbrf-eng.html>, as of June 1, 2010.

Natural Gas Supply Association (n.d.).

Natural Gas and the Environment. <http://www.naturalgas.org/environment/naturalgas.asp>, as of June 21, 2010.

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Call for

Ontario Power Authority [OPA] (2010).

What is the Feed-in Tariff Program?

OPA. <http://fit.powerauthority. on.ca/Page.asp?PageID=1115&BL_ WebsiteID=19>, as of June 21, 2010.

BOOKS

Polczer, Shaun, and Dan Healing (2010, May 28). Alberta’s New Royalty Holiday a Boon for Unconventional Resources. Calgary Herald. <http:// www.calgaryherald.com/business/ Alberta+royalty+holiday+boon+u nconventional+resources/3080119/ story.html>, as of June 1, 2010.

out-of-print Fraser Institute

If you have been a Fraser Institute supporter for some years, you may have some of our books tucked away in your library. The following volumes are out of print, and we are on the hunt for a few copies for our archive.

Income and Taxation in Canada 1961-1975: Fraser Institute Technical Report 76-01 (1976) Wage and Price Controls: Panacea for Inflation or Prescription for Disaster (1976) The Health Care Business: International Evidence on Private versus Public Health Care Systems (1979) Zoning: Its Costs and Relevance for the 1980s (1980) Rent Control: Myths and Realities (1981) Focus: On Economics and the Canadian Bishops (Focus No. 3, February 1983) Industrial Innovation: Its Place in the Public Policy Agenda (1984) Focus: On Employment Equity (Focus No. 17, 1985) Inside the Bank of Canada’s Weekly Financial Statistics: A Technical Guide (1985) Higher Education in Canada: An Analysis (1988) Education in Canada: An Analysis of Elementary, Secondary, and Vocational Schooling (1988)

Rachman, Gideon (2010, May 24).

Shale Gas Will Change the World.

Financial Times (UK). <http://www. ft.com/cms/s/0/d8c79266-676411df-a932-00144feab49a.html>, as of June 1, 2010.

The Market for Legal Services (1988) Economics and the Environment: A Reconciliation (1990) The Law and Economics of Competition Policy (1990) Continental Accord: North American Economic Integration (1991) Economic Freedom: Toward a Theory of Measurement: Proceedings of an International Symposium (1991) Poverty in Canada, 1st edition (1992) Healthy Incentives: Canadian Health Reform in an International Context (1996) Welfare—No Fair: A Critical Analysis of Ontario’s Welfare System (1985-1994) (1996) Economic Freedom of the World, 1997 Annual Report (1997) Global Warming: The Science and the Politics (1997) Beyond the Nass Valley: National Implications of the Supreme Court’s Delgamuukw Decision (2000)

If you have any of these books and are willing to part with them, please contact Kristin McCahon at the Fraser Institute at 604-688-0221 ext. 583, or e-mail kristin.mccahon@fraserinstitute.org and we can discuss the best way to get them to the Vancouver office. We appreciate any help you can give.

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Reuters (2010, March 5). Canada Regulator OKs TransCanada Shale Gas Plan. Reuters. <http://www. reuters.com/ar ticle/idUSTR E6 2350N20100305>, as of June 1, 2010.

Souder, Elizabeth (2009, July 6). Pickens Paring Down Wind Farm Project.

Dallas Morning News. <http://www. dallasnews.com/sharedcontent/ dws/bus/industries/energy/stories/ DN-pickensw ind _ 05bus.State.

Edition1.19e1daf.html>, as of June 9, 2010.

US Department of Energy (2008). Annual Report on US Wind Power Installation, Cost, and Performance Trends: 2007. Government of the United States. <http://www.nrel. gov/docs/fy08osti/43025.pdf>, as of June 23, 2010.

Vidas, Harry, and Bob Hugman (2008).

Availability, Economics, and Production Potential of North American Unconventional Natural Gas Supplies. Prepared for the INGAA Foundation, Inc. <http://www.in gaa.org/File.aspx?id=7878>, as of June 1, 2010.

Welsch, Edward (2010, February 23).

Shale Drilling Moves North, Upending Canada Gas Forecasts. Rigzone. <http://www.rigzone.com/ news/article.asp?a_id=88219>, as of June 9, 2010.

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Economic apocalypse? Hardly British Columbians will be much better off under the new HST Charles Lammam and Niels Veldhuis

W

ith all of the rhetoric coming from the antiHST camp,1 you would think an economic apocalypse was just around the corner in BC. British Columbians, however, should not be misled by the misinformation surrounding the HST. Replacing the provincial sales tax (PST) and the goods and services tax (GST) with a harmonized sales tax (HST) will greatly benefit all British Columbians. It will improve BCâ&#x20AC;&#x2122;s competitiveness, increase business investment, enhance job opportunities, and provide long-lasting economic benefits.

To understand why the move to an HST is beneficial, British Columbians need to be aware of the main problem with the PST: it applies to business inputs as well as many of the goods and services that consumers buy.

When businesses are charged PST on production supplies and capital inputs, such as machinery and equipment, production costs increase and these increased costs are largely passed on to consumers in the form of higher prices. In many cases, a product can be taxed multiple times before it is taxed one last time when purchased by the final consumer.

For example, when British Columbians purchase a bottle of BC wine, they pay the PST on the final price.

That final price, however, already contains a significant amount of PST. The winemaker must pay PST on the inputs he uses to make the wine (i.e., bottles, labels, corks, equipment used to grow grapes, etc.), and these costs are passed on to consumers in the form of higher prices. But thatâ&#x20AC;&#x2122;s not all. The inputs winemakers

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purchase already include PST, since the companies that make those supplies also pay PST on inputs they purchase (i.e., the paper to make the labels, machines to shape the corks, etc.). As a result, PST costs can be compounded many times, depending on the number of stages of production. The PST that businesses pay on inputs is therefore a hidden tax; it is embedded in the price of goods and services, and although consumers don’t see this tax, it is passed on, often multiple times, to the final purchaser.

Even the prices of goods and services that are exempt from the PST (i.e., restaurant meals, hair cuts, taxis, dry cleaning services, membership fees for golf and fitness clubs, financial services, professional services provided by accountants, etc.) contain embedded PST since service providers pay PST on the inputs they purchase, including machinery, computers, software, office equipment, and other supplies.

The HST, on the other hand, is a “value added tax” like the federal GST, meaning that only the value added by the business selling the good or service is taxed. In other words, all business inputs are exempt from the HST. Under the HST, businesses receive refunds (input tax credits) for the sales tax they pay on inputs.

Past experience with sales tax harmonization in Canada shows that competition will lead businesses to pass much of these savings on to consumers through lower prices. For example, in 1997, three Atlantic provinces (Newfoundland and Labrador, New Brunswick, and Nova Scotia) harmonized their PST with the federal GST. Professor Michael Smart of the University of Toronto examined the effects of harmonization and found that overall consumer prices in the harmonizing provinces fell after the 1997 reforms (Smart, 2007).2 Harmonization will not only reduce prices, but it will also reduce the cost of business investment (Chen and Mintz, 2009). Since the PST currently applies to business inputs, including much of the machinery, equipment, and technology (computers and software) firms purchase, it discourages business investment. By eliminating the PST on inputs, the HST will spark more business investment and development.

Here again, past experience with sales tax harmonization in Canada is telling. After the three Atlantic Provinces harmonized their PST with the federal GST in 1997, investment in machinery and equipment (on a per person basis) rose by more than 12% in those provinces compared to the non-harmonized provinces (Smart, 2007).

With more investment and business development, British Columbians will benefit from the resulting increases in productivity, wages, and job opportunities. For instance, University of Calgary professor Jack Mintz estimates that harmonization alone will account for a net increase of 113,000 jobs in BC over 10 years (Mintz, 2010).

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To recoup the lost revenue from refunding the tax paid on business inputs, the HST will apply to a wider array of goods and services than the PST did. In other words, the tax base will be broadened. Broadening the tax base to include a wider array of goods and services creates a more uniform tax burden on all forms of consumption of goods and services.

Opponents of harmonization claim that the elimination of sales taxes on business inputs and the expansion

The HST will improve BC’s investment climate, which will ultimately lead to higher rates of economic growth. of the sales tax base will result in a shift of the tax burden from businesses to individuals. But that view ignores the fact that the burden of all taxes ultimately falls on people—consumers, workers, and business shareholders (see Clemens and Veldhuis, 2003). That tax burden takes the form of higher prices, lower wages, and reduced rates of return.

Opponents of harmonization also ignore the fact that the BC government will implement several initiatives (including personal income tax relief and an expanded sales tax credit) concurrently with the HST in order to offset the total additional amount of sales tax paid by British Columbians (British Columbia, Ministry of Finance, 2010). These initiatives will cushion the impact of the HST on BC families and make harmonization revenue neutral for the government.

Finally, the HST will be cheaper to collect. Since the PST and GST have differing tax bases and a host of different rules, businesses are currently being forced to operate with two sets of sales records and two varying sets of compliance and reporting requirements. Under the HST, businesses will no longer have to comply with two separate tax systems, which will save them an estimated $150 million in tax compliance costs (British Columbia, Ministry of Finance, 2010). In addition, since the HST will be administered federally, the provincial sales tax bureaucracy will be eliminated, saving BC taxpayers another $30 million annually (British Columbia, Ministry of Finance, 2010).

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British Columbians would do well to ignore the anti-HST rhetoric. The HST will improve the investment climate in the province, which will ultimately lead to higher rates of economic growth, more opportunities, and a higher standard of living for British Columbians.

Highlights of the 2010 Global Petroleum Survey continued from page 17

Notes 1 Information about the anti-HST camp can be found at the following websites: www.saynotohstinbc.ca and www.fighthst. com.

2 For a summary of additional Canadian evidence of businesses passing on sales tax savings to consumers, please see Ontario, Ministry of Finance (2010). See Carbonnier (2007) for evidence from France which shows that businesses do pass on sales tax savings to consumers after switching to a value added tax.

References British Columbia, Ministry of Finance (2010). Budget and Fiscal Plan: 2010/11 – 2012/13. Government of British Columbia. <http://www.bcbudget.gov.bc.ca/2010/bfp/2010_ Budget_Fiscal_Plan.pdf>.

Carbonnier, Clement (2007). Who Pays Sales Taxes? Evidence from French VAT Reforms, 1987-1999. Journal of Public Economics 91, 5–6: 1219–29.

Chen, Duanjie, and Jack M. Mintz (2009). The Path to Prosperity: Internationally Competitive Rates and a Level Playing Field: The 2009 Federal-Provincial Tax Competitiveness Report. CD Howe Institute. <http://www.cdhowe.org/pdf/ commentary_295.pdf>.

Clemens, Jason, and Niels Veldhuis (2003). Who Pays Business Taxes? Fraser Forum (October): 30–31. <http://fraser. stg.devlin.ca/Commerce.Web/product_files/Who%20 Pays%20Business%20Taxes~%20A%20Different%20 View-Oct03clemens.pdf>.

Mintz, Jack (2010). British Columbia’s Harmonized Sales Tax: A Giant Leap in the Province’s Competitiveness. SPP Briefing Papers 3, 4. University of Calgary, School of Public Policy. <http://www.fin.gov.bc.ca/Mintz_report.pdf>.

Ontario, Ministry of Finance (2010). Ontario’s Tax Plan for Jobs and Growth: Technical Paper on How the Tax Changes Affect People. Government of Ontario. <http://www.rev. gov.on.ca/en/taxchange/pdf/technical_consumer.pdf>.

Smart, Michael (2007). Lessons in Harmony: What Experience in the Atlantic Provinces Shows about the Benefits of Harmonized Sales Tax. CD Howe Institute. <http://www. cdhowe.org/pdf/commentary_253.pdf>.

states or offshore regions. As indicated, uncertainty and/or the cost of compliance with environmental regulations has a lot to do with investor pessimism regarding those jurisdictions. If policy makers in those states, provinces, and territories want to be more successful at attracting petroleum investment in what has become a tough, globally competitive environment, they must be aware of the reasons for investors’ concerns and introduce changes to existing laws, regulations, and/or institutional arrangements. It is only by taking steps to improve the competitiveness of their jurisdictions that they can hope to overcome their present difficulties.

Notes 1 No responses were received after the BP Horizon drilling rig platform sank off the coast of Louisiana on April 22, causing a massive leak from the oil well into the seabed.

2 A minimum of five responses to each survey question were required to evaluate and score a jurisdiction.

3 For example, on March 3, 2009, the government introduced a temporary drilling royalty credit and a maximum 5% royalty on first-year production for new conventional oil and gas wells (Alberta, Department of Energy, 2009).

References Alberta, Department of Energy (2009). Province Announces Three-point Incentive Program for Energy Sector. News release (March 3). <http://alberta. ca/ACN/200903/25402CDEFE818-F1BC-5D66DF309066E457F2A4.html>.

Angevine, Gerry, and Miguel Cervantes (2010). Fraser Institute Global Petroleum Survey 2010. Fraser Institute.

International Energy Agency [IEA] (2009). World Energy Outlook 2009. IEA.

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Prescription drug spending in Canada and the United States Government intervention offers no cost advantage for consumers Mark Rovere

P

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rescription drug policies have become a contentious issue in both Canada and the United States as governments look for ways to manage health care costs. Since American prices for prescription drugs are often higher than prices in Canada, there is a common misconception that the individual cost burden of prescription drug spending in the United States is unfair.

However, when drug expenditures as a percentage of personal

income are compared, the relative burden of prescription drug spending is roughly the same in Canada and the United States. This finding is critical because it refutes the notion that the Canadian government’s involvement in the prescription drug market results in cost advantages for consumers and thus is superior to

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the relatively more free market policies of the United States.

While Canadian and American governments have the same objective of ensuring access to the highest quality health care at the lowest cost, their prescription drug policies have traditionally been polar opposites. Canadian governments are considerably more interventionist in prescription drug markets than their American counterparts.

For example, once a new patented drug (brandname) is approved

by Health Canada as safe and effective, its price must be approved by the Patented Medicines Price Review Board (PMPRB) in order to ensure that the price is not “excessive.”1 Once Health Canada and the PMPRB approve the drug (and its price), each province decides whether or not to make to the drug eligible for public reimbursement under their respective public drug programs. As provincial reimbursement decisions often become politicized and are based on provincial budgets, provincial formularies (the list of drugs eligible for public reimbursement) are often restrictive. More often than not, provinces

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decide not to add new drugs to their formularies, significantly reducing access and personal choice for the many Canadians who are dependent on public drug plans (Skinner and Rovere, 2010a).

The prices and supply of generic drugs is also distorted by government policies. Not only do provincial governments regulate generic drug prices covered by provincial public drug plans,2 but they also impose policies that force public drug plan recipients to use generic versions of drugs, even if a brandname drug is prescribed. Some of these policies even involve forcing a patient to substitute a generic drug that is not “biochemically” equivalent to the brand-name drug that they were prescribed (Graham and Tabler, 2005).

In other words, the price and supply of prescription drugs (brandname and generic) in Canada are heavily distorted because of government interference.

In contrast, governments in the United States tend to allow competitive market forces to determine the supply and prices of prescription drugs.

Our analysis permits us to measure and compare the differences in the personal (individual) cost burden of prescription drug spending in the two countries. Comparing prescription drug spending in Canada and the United States offers some indication of the success (or failure) of

the Canadian government’s interference in the prescription drug market.

Same spending The Average Personal Affordability of Prescription Drug Spending in Canada and the United States (2010 Edition)3 compares average per capita prescription drug spending in Canada and the United States in order to determine whether Canada’s prescription drug policies have resulted in lower drug costs for Canadians.

The study examines per capita Canadian and American prescription drug spending as a share of both per capita national income (gross domestic product, or GDP) and per capita personal after-tax income (personal disposable income, or PDI) using 2009 data, the most recent year for which data are available. As with the 2008 edition

of our report, the findings of the 2010 report suggest that Canadian prescription drug policies do not result in lower personal drug costs for Canadians. Figure 1 shows prescription drug spending as a share of per capita GDP and as a share of per capita PDI for Canada and the United States in 2007 and 2009.

As figure 1 shows, Canadians (on average) spent 2.5% of their per capita PDI on prescription drugs in 2007, compared to 2.6% in 2009.

Americans spent less of their per capita after-tax income (2.3%) on prescription drugs than Canadians in both 2007 and 2009.

Comparable results were found when prescription drug spending as a share of per capita GDP was analyzed. Canadians (on average) spent roughly 1.5% of their per capita GDP on prescription drugs in 2007, compared to 1.7% in 2009 (figure 1).

Americans spent the same percentage of their per capita GDP on

Figure 1: Personal prescription drug cost burden in Canada and the United States, 2007 and 2009 3.0 2.5%

2.6%

2.5

2007 2.3% 2.3%

2.0 Percent

2009

1.7%

1.7% 1.7%

1.5%

1.5 1.0 0.5 0.0

Canada

United States

Personal Disposable Income

Canada

United States

Gross Domestic Product

Source: Skinner and Rovere, 2010b.

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prescription drugs in 2007 as they did in 2009—roughly 1.7%.

The data show that in the two years observed, Canadians and Americans (on average) spent approximately the same share of their income (before taxes and after-taxes) on prescription drugs. There are no significant differences in the use of prescription drugs in the two countries. In 2009, 14.2 prescriptions were dispensed per person in Canada, compared to 12.7 in the United States (Skinner and Rovere, 2010b).

Our findings are primarily explained by differences in drug prices in Canada and the United States. While Canadian prices for brand-name drugs are lower than American prices for identical drugs, the prices of Canadian generics are more than double the prices for identical American drugs. In 2007, brand-name drugs in Canada were about 53% less expensive (on average) than those in the United States; generic drugs in Canada were approximately 112% more expensive (on average) than identical drugs in the United States (Skinner and Rovere, 2008).

Our research shows that high prices for generic drugs in Canada are the result of Canadian government policies that interfere with competitive market forces, which would naturally put downward pressure on generic drug prices. Instead of allowing consumer demand to determine the price and supply of generic drugs, provincial governments distort the market for generics by arbitrarily regulating prices and by removing consumer price sensitivity with the use of inefficient public reimbursement arrangements (see Rovere and Skinner, 2010). Although provincial governments have attempted to lower generic drug prices through regulation, we find that government interference in the generic drug market has not resulted in lower prices for Canadians, relative to prices for identical drugs in the

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United States. Therefore, although prices for brand-name drugs are lower in Canada (on average), these savings are offset by significantly higher generic drug prices.

In addition, because generic drug prices are significantly lower in the United States, Americans utilize generic drugs at a higher rate than Canadians do. This also partially explains our findings. In 2009, 75% of all prescriptions dispensed in the United States were for generic drugs, compared to 25% for brand-name drugs. By contrast, in the same year, 54.3% of all prescriptions dispensed in Canada were for generic drugs, compared to 45.7% for brand-name drugs (IMS Health Inc., 2010; IMS Health Inc. Canada, 2010).

Conclusion Comparing prescription drug spending in Canada and the United States offers some indication of the success of the Canadian government’s interference in the prescription drug market. Our research shows that government interference in the prescription drug market in Canada leads to distortions affecting prices and supply, and does not produce personal affordability advantages for consumers (on average). People in Canada spend approximately the same share of their income on prescription drugs as people in the United States, where the supply and prices of prescription drugs are generally determined by market forces.

Moreover, research indicates that government interventions, such as price regulations, negatively affect economic incentives for businesses to invest in innovative medicines (Giacotta et al., 2005; Vernon, 2005).

Unlike Canada, the United States is a global leader in the production of innovative medicines because it has the appropriate incentives in place to encourage private investment in scientific research and development.

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Thus, not only does government interference in the prescription drug market offer no personal affordability advantages to consumers, but it also deters private investment in the development of ground-breaking medical innovations.

Notes 1 In order to measure whether introductory prices for new patented drugs are “excessive,” the PMPRB compares the prices of new drugs (set by the manufacturer) to prices for the same drugs in a select group of seven comparator countries. If the PMPRB determines that the price of a patented drug is “excessive,” they can order the patentee to reduce the price and force it to relinquish any excess revenues it may have received (PMPRB, 2009).

2 Since 2006, the price of generic drugs in Ontario (covered under the provincial public drug plan) could not exceed 50% of the price of the original brand-name drug. Beginning on July 1, 2010, the price of generic drugs will be fixed at 25% of the price of the original brand-name drug, and the government plans to regulate generic drug prices for the private sector as well (Ontario, Ministry of Health and Long-Term Care, 2010). A number of other provinces are looking to follow Ontario’s lead. Quebec recently announced that it will also regulate generic drug prices at 25% of the original brand-name drug.

3 In previous years, this report was titled the Cost Burden of Prescription Drug Spending in Canada and the United States.

References Giaccotta, Carmelo, Rexford E. Santerre, and John A. Vernon (2005).

Drug Prices and Research and Development Investment Behavior in the Pharmaceutical Industry.

Journal of Law and Economics 48, 1 (April): 195–214.

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www.fraserinstitute.org

Graham, John, and Tanya Tabler (2005).

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