Aldyen Donnelly: NRTEE’s new economy doesn’t have any manufacturing in it

For the very first time I actually agree with the major findings outlined in one of Dr. Jaccard’s reports. In this regard, there are only two tables in the new NRTEE (National Round Table on Energy and the Environment) report that really matter. Figure 20 from page 81 says, clearly, that after implementation of the NRTEE recommendations Canadian raw resource extraction activities (items M, N, O in the table) are going to increasingly contribute to Canada’s GDP through 2050, but acts of adding value to our raw resources (A through F plus H and I) will be removed from the Canadian economic landscape. The Figure’s forecast substantial reduction in commercial freight’s contribution to Canada’s GDP (column C) is also significant, suggesting that the modelers are forecasting the demise of Canada’s major ports and our non-energy resource trading activity.

Some aspects of the table strike me as quite remarkable. For example, today, Canada’s electricity sector contributes less than $2 of GDP for every $10 our manufacturers contribute. When we apply the % changes in contribution to GDP shown in the graph to actual Statistics Canada 2006 estimates by sector, this graph suggests that by 2020 the tables will turn and Canada’s electricity sector will be contributing $5 to $6 of GDP for every $1 our manufacturers are contributing. The % increase in biofuels production in the forecast is large, but it derives from a tiny baseline. The contribution to GDP or forecast new biofuels industry is a small fraction of the GDP lost in manufacturing. When multiply the 2006 baselines for the sectors included in Figure 20 by the suggested % changes, I am left with a large whole in Canada’s 2020 GDP. One might ask Dr. Jaccard to release a complete table breaking down the entire CIMS forecast for the post-policy make-up of Canada’s GDP in 2020. Specifically: what is the government expenditure share of GDP in 2020 after we implement the NRTEE recommendations?

I absolutely see how the report’s recommended policy/tax strategy will achieve the stated GHG reduction objectives. After all, GHGs are byproducts of the resource value-adding processes. It is pretty easy to agree that implementation of the plan outlined in the NRTEE report will result in a substantial shift of capital investment away from Canadian value-adding activity to build a new Canadian economy dependent almost exclusively on energy exports. I completely agree, therefore, with the essential finding illustrated in this figure: if the government of Canada adopts NRTEE’s recommendations, we will see massive shrinkage in our goods producing sectors and increased long term dependence on raw resource extraction and exports and power exports for our economic survival.

 

The second meaningful–or perhaps curious–table is the following: 

Figure 17 suggests that the disposable income gap between Canada’s poorest and richest families will, somehow, narrow quite significantly between 2009 and 2020. I have not yet found the explanation for this phenomenon in the report. but this table tells us that CIMs anticipates that between 2009 and 2020 the disposable incomes of Canada’s poorest families will grow 2.27 times, while the disposable income of our wealthiest families will grow only 1.76 times from 2006 actual levels. It is not apparent, in the report, how we will accomplish this reversal of the trend of the last 15 years of higher incomes growing faster than lower incomes, especially given the highly regressive nature of carbon/energy consumption taxes.

The authors note that the illustrated estimate of the impact of the carbon tax on disposable incomes assumes not abatement efforts. The authors fail to note that as of 2006 over 50% of the poorest 20% of families did not own any car, while over 90% of the 40% wealthiest families owned more than one vehicle. Also, as of 2006, 65% of the poorest 20% of families rent their homes and have limited control over heating and appliance choice, while over 85% of the 40% wealthiest families own their own home and have heating system and appliance choice. Clearly, even if the poorest families can secure credit, their energy cost abatement/tax avoidance options are extremely limited compared to the 40% wealthiest of families. Many studies demonstrate that low income household do not/cannot "respond to the price signal". The analysis falls short in its failure to reflect that known fact either in the Figure or in the text referencing the Figure.

Perhaps I should also note that the economic shift to resource production/exports that is implied in the NRTEE report’s Figure 20 is consistent with the experience of other nations that have: (1) executed a "green shift" and (2) have any domestic fossil fuel reserves. Probably most notable is Denmark. We all often read of the growth in Denmark’s electricity technology and power exports, which is typically attributed to that nation’s green shift. What is rarely reported is the fact that the post-"green shift" Danish economy is more dependent on fossil fuel trade (both imports and exports) than any time in the nation’s history (see below). In this regard, it can be said that the CIMs model output does a pretty good job of reflecting the actual economic shifts that have been experienced in the countries whose policies the modelers advise us to import to Canada.

How is the NRTEE’s proposed carbon tax scheme is so different from the energy tax structure in the UK?

UK budget documents for 2006 include the following table, which shows that UK hydrocarbon taxes eat up almost 2 times the % of low income families’ disposable income that they take from wealthy families. (It is worth noting that the UK "Climate Change Levy" (CCL) is not reflected in this table. The CCL raises only 700 million pounds sterling in annual revenues and applies only to energy sales to UK manufacturers. Residential and commercial customers are CCL exempt, as are UK oil and gas producers, refineries and power producers.)

Note that the UK reports that while Value Added Tax (like our GST) is almost as regressive as the energy tax. I must admit, I thought VAT would be less regressive than found in the UK. I guess alot depends on which commodities are VAT-exempt. Any plan to finance income tax cuts with energy tax revenues makes our tax system substantially less progressive. This makes Figure 17 in the NRTEE report more curious in its suggestion that disposable incomes for the poor will grow faster than for the rich under the policy recommendation.

In passing, I also think it is important to note that industries often adjust wholesale prices to shift tax burdens from one class of customers to another. For example, we know from the BC government budget documents that BC collected just under $60 million in the form of gasoline and diesel taxes over the last 6 months of 2008. But Statistics Canada reports that tax-included diesel fuel prices fell by at least $0.03/litre over that period and gasoline prices actually increased by a factor a little larger than the new tax. Given the dramatic fall in wholesale gasoline and diesel price increases, it is apparent that over the first 6 months of the BC carbon tax: (1) transportation fuel distributors realized a combined fuels margin increase at least equal to the tax increase and (2) they adjusted wholesale prices to shift 100% of the road fuel tax increase non-commercial (gasoline) consumers and away from the largely commercial (diesel) consumers. Perhaps not surprisingly, BC diesel fuel sales increased an unprecedented 8.8% over the prior year (on an annualized basis) in the first year of BC’s carbon tax. BC gasoline consumption fell very slightly, exactly in line with the average annual rate of change that has been established in BC since 2000.

 

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