{"id":13974,"date":"2006-08-28T04:00:50","date_gmt":"2006-08-28T04:00:50","guid":{"rendered":"https:\/\/irpporg.kinsta.cloud\/irpp-study\/article-2008-08-28\/"},"modified":"2006-08-28T04:00:50","modified_gmt":"2006-08-28T04:00:50","slug":"article-2008-08-28","status":"publish","type":"irpp-study","link":"https:\/\/irpporg.kinsta.cloud\/fr\/irpp-study\/article-2008-08-28\/","title":{"rendered":"Energy Prices, Equalization and Canadian Federalism"},"content":{"rendered":"

In this paper, originally published in the Queen’s Law Journal<\/em>, Thomas J. Courchene (IRPP Senior Scholar and Jarislowsky-Deutsch Professor at Queen’s University) traces the history of Equalization and the ebbs and flows of its treatment of resource revenues, with particular attention to the high energy prices of 1973 to 1986 and of 2003 onwards.<\/p>\n

At the Equalization Program’s formal inception in 1957, only three taxes (personal income taxes, corporate income taxes and succession duties) were treated by\/came under the equalization formula. This was the logical outcome of the decision to transfer tax points from these three revenue sources from Ottawa to the provinces. Since the value of a tax point is worth more in the richer provinces, the poorer provinces insisted on equalization to compensate for provincial variations in wealth. During the 1960s, it became apparent that provincial differences in resource endowments (and the revenues they generated) were leading to anomalous equalization outcomes (such as Alberta receiving equalization payments), and efforts were made to compensate for these inequities.<\/p>\n

The sharp increases in the price of crude oil in the 1970s accentuated the distortions that resource revenues caused to equalization. Ottawa’s initial response was to keep domestic prices lower than world prices via an export tax that was used to subsidize imports. This nullified the impact of high prices on the equalization formula, but caused other problems by removing the incentives for energy conservation and additional oil exploration.<\/p>\n

In 1979-80, the already high crude oil prices doubled again, rendering the existing energy policy obsolete, particularly with respect to maintaining the domestic price-world price differential. In response, the federal government introduced the National Energy Program (NEP), which imposed a variety of new taxes on oil and natural gas and increased public ownership of the energy sector. While only in place for four years, the NEP had ramifications beyond the energy patch and the West, to profoundly influence Canada’s political, constitutional and federal evolution.<\/p>\n

Other policy responses to the 1979-80 oil price shock were the addition of section 92A to the Constitution, which grants the provinces exclusive legislative authority over natural resources (as well as broad taxation powers), and the five-province standard (FPS), according to which Quebec, Ontario, Manitoba, Saskatchewan and British Columbia are included in the equalization formula. The author notes that this five-province standard was a stroke of genius, and remained in place for nearly one-quarter of a century, in part because the exclusion of Alberta’s energy base from the formula served to insulate the equalization program from future energy price shocks. And, of course, the West bought fully into the energy provisions of the Canada-US Free Trade Agreement, and therefore the agreement as a whole, because they ensured that another NEP would be difficult to implement.<\/p>\n

The policy environment of the current energy price spike is dramatically different from that of the 1970s. Canadian energy prices now fluctuate in lockstep with global energy prices, and Ottawa has no designs on energy revenues, either in the form of subsidized domestic energy prices or of export\/excise taxes, in contrast with the earlier period. Part of the reason is that this time around Ottawa is awash in cash as the result of a near-decade-long string of budgetary surpluses. Moreover, the equalization program is legislated to grow by 3.5 percent annually, so it is essentially immune from ballooning energy rents. Indeed, the energy-related boom is serving to further fill federal coffers, especially via income taxation. Thus, not only is there no fiscal rationale for a repeat of a NEP-type scenario, but the provinces are left free to capture any or all of the increased energy rents should they so wish. Beyond this, the NEP-triggered entrenchment of section 92A in the 1982 Constitution Act <\/em>means that another NEP would arguably be unconstitutional, and such a policy would, in any event, be much more difficult to implement politically.<\/p>\n

Courchene then points out that the US$70+ oil prices are going to present a challenge, namely, that while the impact on the formal equalization program may be minimal, there is a growing disparity across provinces in terms of per capita revenues. The existing equalization program essentially brings the per capita revenues of the poorer provinces up toward the so-called five-province standard (essentially up toward the Ontario level). But thanks to soaring energy rents, this means that the four fossil-energy-rich provinces (Alberta, Saskatchewan, Newfoundland and Labrador, and, British Columbia) are pulling away from the rest of the other six provinces. Courchene believes that if this pattern becomes entrenched (as it will if US$70+ oil prices continue) we will be edging toward a two-tier system of provincial services \u2013 one for the energy-rich and one for the rest. One approach to this challenge would be to establish a voluntary revenue-sharing pool for all resource revenues: each province would contribute, say, 20 percent of its resource revenues to the pool and would draw from the pool on an equal per capita basis, with the pool managed under the aegis of the Council of the Federation. Courchene concludes that this approach would be politically unfeasible because the resource-rich provinces would resist it.<\/p>\n

A more politically viable approach would be to alter the existing clawbacks to the Canada Health Transfer and the CanadaSocial Transfer (CHT\/CST). Specifically, after some generous threshold \u2013 say 110 percent of national average per capita revenues, including resource revenues \u2013 a province would lose 20 cents of the CHT\/CST transfer for every dollar that province’s revenues are over the 110 percent threshold, and the resulting savings would be returned to the provinces in order to reduce the vertical fiscal imbalance.<\/p>\n","protected":false},"excerpt":{"rendered":"

In this paper, originally published in the Queen’s Law Journal, Thomas J. Courchene (IRPP Senior Scholar and Jarislowsky-Deutsch Professor at Queen’s University) traces the history of Equalization and the ebbs and flows of its treatment of resource revenues, with particular attention to the high energy prices of 1973 to 1986 and of 2003 onwards. At […]<\/p>\n","protected":false},"featured_media":0,"parent":0,"template":"","meta":{"_acf_changed":false,"footnotes":""},"site-category":[],"section":[],"site-tag":[],"class_list":["post-13974","irpp-study","type-irpp-study","status-publish","hentry"],"acf":[],"_links":{"self":[{"href":"https:\/\/irpporg.kinsta.cloud\/fr\/wp-json\/wp\/v2\/irpp-study\/13974","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/irpporg.kinsta.cloud\/fr\/wp-json\/wp\/v2\/irpp-study"}],"about":[{"href":"https:\/\/irpporg.kinsta.cloud\/fr\/wp-json\/wp\/v2\/types\/irpp-study"}],"version-history":[{"count":0,"href":"https:\/\/irpporg.kinsta.cloud\/fr\/wp-json\/wp\/v2\/irpp-study\/13974\/revisions"}],"wp:attachment":[{"href":"https:\/\/irpporg.kinsta.cloud\/fr\/wp-json\/wp\/v2\/media?parent=13974"}],"wp:term":[{"taxonomy":"site-category","embeddable":true,"href":"https:\/\/irpporg.kinsta.cloud\/fr\/wp-json\/wp\/v2\/site-category?post=13974"},{"taxonomy":"section","embeddable":true,"href":"https:\/\/irpporg.kinsta.cloud\/fr\/wp-json\/wp\/v2\/section?post=13974"},{"taxonomy":"site-tag","embeddable":true,"href":"https:\/\/irpporg.kinsta.cloud\/fr\/wp-json\/wp\/v2\/site-tag?post=13974"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}