Opinion: Canada’s resources sector is stifled by poorly designed regulations

Jack Mintz is a Presidential Scholar at the University of Calgary School of Public Policy. Phil Cross is a senior fellow at the Macdonald-Laurier Institute. This article is based on remarks made at the C. D. Howe Institute and Macdonald-Laurier Institute energy conferences and recent article.

Resources have been a major part of Canada’s economic prosperity since its founding. Yet many Canadians downplay these important assets, viewing the resource as a “curse” or “Dutch disease.” Instead, we should consider ourselves lucky to have inherited such abundance.

Going back to the British economist David Ricardo, our comparative advantage in trade is to export products that are relatively cheaper to produce at home, while importing products that are relatively more expensive to produce at home. This is the case in Canada: exports are dominated by the high-productivity resources sector. Energy, forestry, fisheries, mining and agriculture account for one third of our export revenues. In terms of the trade balance, the resources sector is entirely responsible for our commodity surpluses. Without resources, Canada would have a trade deficit and a plummeting exchange rate.

The primary industry produces 14.9% of Canada’s GDP. Quite strikingly, resources account for 45 percent of production. This is not surprising because products produced in the food, timber, mining and oil industries are competitive. Despite the decline in commodity prices since 2014, the resources industry still accounts for almost 45% of business investment, of which almost two-thirds of resource investment is in energy.

Many people believe that with little innovation, resources deplete productivity. However, technological changes in the resources sector have been critical over the years. The resources sector ranks high in terms of employment of knowledge workers. New types of agricultural and forestry products, pipeline technology, and the development of oil sands technology had a dramatic impact on the development of Canada.

Many factors influence investments, including tax and regulatory policies. Investments in oil and gas are taxed the most, while those in the manufacturing sector are the least taxed. Capital taxes increase by one third for all sectors of the economy as accelerated depreciation is phased out by 2028. This will reduce investment by a projected $17 billion (or 3.5%).

The second important factor is regulation. It’s hard to build something in Canada. Regulatory requirements and delay costs pose barriers to new investment in pipelines, power generation, transmission lines and oil sands plants. The federal Impact Assessment Act delayed projects by up to eight years, increasing the potential tax burden on projects by 20%. Given the urgent need for significant investment in mining, our current regulatory system is a major obstacle to development.

The best example of our shaky approach is the issue of liquefied natural gas. Several European countries, including Germany, Greece and Poland, would welcome Canadian gas if it escapes Russian energy. Asian countries such as Japan and Korea would prefer to import Canadian LNG via the Pacific rather than from the volatile Middle East. However, unlike Australia and the United States, almost all LNG proposals have been withdrawn over the past decade, with only one project in Canada close to completion.

So how can Canada encourage more investment in the resources sector? Here is a five-point plan based on the public policy goals of improving economic efficiency, simplification, fairness and efficiency.

Firstly, there is a need for reform of the regulatory system, in particular the Act on Impact Assessment. We should no longer offer budget-wrecking subsidies, but instead pursue smart policies that could attract capital.

Second, Canada should make significant investments in approved domestic corridors that allow transportation and transmission lines to deliver products to foreign jurisdictions, such as wood chips from British Columbia, natural gas and oil from Alberta, and wheat from the prairies.

Third, federal and provincial governments should support research into new innovations undertaken by universities and the private sector, both in resources and production.

Fourth, we need to implement a “big bang” tax reform that moves away from taxing capital. For example, we wouldn’t have to rely on subsidies if we had a business tax structure more like that in Ireland or Estonia.

Fifth, we need to radically reform our current complex approach to carbon policy. If carbon is priced correctly, $160 billion in subsidies will not be needed as industry works to reduce greenhouse gas emissions. Revenues from emissions should be used to support research into new technologies, support investment and reduce taxes for those who are unable to cope with rising energy prices.

This is a tall order for public policy, but it would support not only the manufacturing and other sectors but also the resource-intensive industries that constitute our greatest comparative advantage. With the right policy framework in place, our real GDP per capita should be rising, not falling as we have seen recently.