While the U.S. invests in energy, Canada backs away. Guess who will benefit
Trump's pro-investment policies are attracting capital and businesses once destined for Canada
U.S. President Donald Trump was supposed to be a White House train wreck. And indeed, his governing style has been chaotic and unnerving, even shocking.
But as the president enters his second year in office, he has nonetheless scored a number of policy wins that will boost the U.S. economy, create well-paid jobs and advance his administration's ambition of American energy dominance. Canada should take notice.
Former presidents once focused on "energy independence," which was neither practical nor necessary when friendly neighbours – such as Canada and Mexico – could help meet the country's energy appetite.
In contrast, President Trump wants his country to export energy, use its natural resources to fuel domestic economic growth and advance U.S. foreign policy by providing energy security to its allies, thereby weakening Russia and hostile OPEC nations. This policy adjustment is so practical it will eventually be perceived as common sense.
Accelerating production
To increase U.S. output of oil, natural gas and coal, Trump signed an executive order approving Alberta's Keystone XL and the Dakota Access pipelines soon after entering the White House a year ago. He also lifted a moratorium on new coal leasing on federal land and abandoned the Paris climate agreement, promised to open Alaska's Arctic National Wildlife Refuge to oil drilling (now achieved) and cut job-killing and investment-killing red tape.
The U.S. doesn't support the United Nations "consensus" that economies powered by costly and unreliable green renewables are better able to manage local or global environmental challenges. The country's shale gas revolution goes a long way to validate this, as new extraction technologies twinned with entrepreneurialism has meant having both abundant and affordable natural gas and lower carbon dioxide emissions. Since 2005, the U.S. had the largest CO2 reduction of any country in the world and its energy-related carbon dioxide emissions in 2015 are 12 per cent below its 2005 levels.
Washington is betting energy from hydrocarbons and a strong economy will improve living standards — not lower them as the most extreme environmentalists tell us. In late December, before leaving for its Christmas recess, Congress passed the biggest tax overhaul in 30 years. This sweeping tax bill dramatically lowered the U.S. business tax rate from 35 per cent to 21 per cent.
The tax relief isn't being slowly phased in over a decade. It happened overnight – effective Jan. 1, 2018 – and caused Canada to lose its once touted tax advantage over its southern neighbour. The average federal-provincial combined tax in Canada is now about one point higher than the combined U.S. federal-state rate. Until 2017, our combined tax rate was 12 points lower, which gave businesses a powerful incentive to invest in Canada.
President Trump likened his tax changes to "rocket fuel" for the U.S. economy. Canadian tax expert Jack Mintz seems to agree, writing in the Financial Post that "federal and provincial authorities will need to change course. If politicians sit on their hands, the private sector won't: Canadians will see investment, jobs and profits flowing to the States."
And there's more happy news for U.S. energy companies: prior to Trump's reforms, capital costs couldn't be deducted in the year they happen. The new U.S. law allows capital expenditures to be written off in the year they are incurred, which, according to Forbes magazine, "will further lower the tax burden for the energy sector while encouraging more capital spending."
When Canada and the U.S. have had broadly aligned energy policy, which is the historical norm, the outcome has led to aligned prices for consumers and our two economies. So, what's happening in Canada?
Prime Minister Justin Trudeau is also motoring ahead on his own energy policy, but his government's objective seems to be to shackle Canada's hydrocarbon energy industry.
Pipeline politics
Like Trump, Trudeau wasted no time pursuing his agenda when he assumed office by banning tankers off B.C's North Coast and later cancelling the Northern Gateway pipeline project from Alberta to British Columbia.
Prior to the 2015 election, the Liberals were generally pro-pipeline, but in office they have done just enough to ensure that we cannot say nothing has been done: Ottawa approved an upgraded replacement line from Alberta to the U.S. as well as the Trans Mountain pipeline expansion project to B.C. — which today is tied up in regulatory delays.
The Energy East pipeline to New Brunswick was killed in 2017 after Ottawa signalled that it wanted the National Energy Board to add layers of regulations on "upstream and downstream" CO2 emissions. Compliant NEB officials later said they would – for the first time – review emissions from potential increased production and consumption of the oil transported by the pipeline.
Fewer jobs and higher prices
The effects of these policy changes, combined with rising taxes on carbon dioxide emissions through the federal government's soon-to-be unveiled Clean Fuel Standard regulations, mean less investment in Canada's oil sector, lost employment opportunity and higher energy prices at home.
RBC Dominion Securities recently warned that Canada cannot get its oil to international markets because it lacks enough pipeline capacity, as a result it is forced to sell its product at a lower price to the few buyers it can reach. In other words, because our oil is unable to reach either the Pacific or Atlantic oceans, we are left with one foreign customer – the United States – which sets the discount price.
Reuters has reported that oil companies have already left Canada to invest in the U.S., and in 2017 sold over $23-billion in Canadian assets. It has also reported that output from Canada's oilsands will grow, "but only as projects under construction are completed and smaller expansions come online." But energy companies aren't building new large projects. Why? Prices aren't high enough here and better returns are realized elsewhere in North America. It's a consequence of public policy choices, taxes and red tape.
On energy, Trudeau is deliberately going in the opposite direction of the U.S. and the world's other energy-rich nations. What he couldn't foresee was his plans being accelerated by Trump's pro-investment policies, which are attracting capital and businesses once destined for Canada's energy industry. The divergent Canada-U.S. policies will lead to dramatically different outcomes, with higher energy prices and less employment in the oil and gas sector on our side of the border. And ultimately, the cost will be paid by Canadians at home and at work.
This column is part of CBC's Opinion section. For more information about this section, please read this editor's blog and our FAQ.
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