October 16, 2004
To counter the high energy prices that consumers now face, governments in Canada and the U.S. have been subsidizing domestic energy production. This dirty government business lowers the bill a little for consumers but raises it a lot for taxpayers, making us worse off in the exchange.
Much better to offshore our unproductive industries, most of them energy guzzlers, to reduce energy demand. That would lower both our energy bills and our tax bills. Magnifying the benefits, such offshoring would also eliminate the subsidies our bad businesses receive.
The latest money sinkholes come in the form of Arctic pipelines. Earlier this week, the U.S. Senate provided an 1,800 mile Alaskan pipeline project with US$18-billion in loan guarantees – fully 90% of the cost of the project’s estimated costs – all to bring natural gas to southern markets a decade from now.
The generosity shown the pipeline’s backers – a consortium including BP, Exxon Mobil and ConocoPhillips – may be just the beginning of the immense subsidies this project will need. The companies, worried that energy prices may plummet after the Middle East conflagrations pass, have been lobbying for floor prices for their natural gas. Should the price of the project increase as expected – TransCanada’s competing and also uneconomic Arctic pipeline project has just seen its cost rise by one-third – the invisible corporate hand that guides much of the economy will again be outstretched, in demand for fresh subsidies.
Arctic pipelines are just the tip of the iceberg when it comes to subsidizing the continent’s energy systems. Since the 1960s, most major energy investments – whether in tar sands, nuclear plants, hydroelectric dams or ethanol – have had no economic justification. Rather, they have typically met two political needs – direct support for unviable energy industries and indirect support for unviable energy-intensive industries, often in resource sectors. Continent wide, perhaps one-quarter of all energy is consumed in uneconomic industries, with Canada the disproportionately bigger wastrel.
The Quebec government, one of the most aggressive subsidizers, has long attracted electricity intensive industries with offers of cash and deep-discounted power, provided courtesy of state-owned Hydro-Quebec. Two years ago, for example, the previous Parti Quebecois government convinced aluminum giant Alcoa to spend US$825-million expanding a smelter at Baie Comeau. The price? An US$128-million interest-free loan, a 10-year provincial tax holiday, and dirt-cheap power. The estimated cost to the provincial purse per job created? Some $100,000.
The deal came unstuck this year after a newly elected Liberal party reneged on the agreement and in its stead offered a mere US$100-million interest-free loan and 50 years of “low-cost electricity” with annual rate hikes no higher than inflation. The estimated cost per job? $60,000.
The prospect of electricity costs rising with inflation was too much for Alcoa to contemplate. “We could not reach an agreement on a formula that would have ensured long-term affordable energy for the Baie-Comeau modernization project,” Alcoa Canada Primary Metals president Jean-Pierre Gilardeau said in June, in announcing the breakdown of negotiations. “With energy representing more than 30% of our operating costs, we simply cannot invest $1-billion [Canadian] in a project with the risk that energy prices will rise considerably over the life of that project. Over 40 years, even with only moderate increases, energy would represent a $10-billion cost.”
The story will have a happy ending, but only if the negotiations aren’t revived and Alcoa builds its smelter elsewhere. In Quebec, taxpayers will be spared and electricity rate-payers, too – to pay for Alcoa’s cheap power, Hydro-Quebec has been raising electricity rates on its residential customers. The additional money in the pockets of Quebec citizens will be spent in more productive ways, creating more jobs than those lost at the smelter.
Alcoa would then move on, as it has already begun to do, to the many countries that can intelligently host energy-intensive industries. Often these are developing countries with vast natural gas reserves that don’t lend themselves to ready export. Alcoa this week announced that it would be building a 322 tonne aluminum smelter in Trinidad and Tobago, an island nation that can’t easily bring its vast natural gas reserves to market. The smelter industry will create jobs in Trinidad where it would cost jobs in Quebec, and it will help the island develop rationally, where it prevents Quebec from developing rationally.
For such reasons, Alcoa and other energy-intensive industries are slowly vacating the continent, their rate of departure slowed only by their access to below-market energy supplies, and to the public purse. Cut off their access and they’ll more quickly gravitate offshore, where they’re wanted and needed. Cut off their access and North America won’t need to subsidize energy megaprojects because we, too, will become awash in energy.