Canada West Foundation Blog

by Michael Holden, Senior Economist

Resource royalties are a valuable source of revenue for provincial governments in western Canada. In fact, they have been rising steadily in importance since the early 1990s and are nearly as important to provincial government revenues today as they were at the tail end of the 1979 energy crisis . While royalties are a boon to governments’ bottom lines, they present considerable challenges when it comes to long-term planning and fiscal management.

I began examining trends in royalty income as part of my preliminary work on the Canada West Foundation’s "Powering Up" Project. My colleagues and I have been working on creating a detailed and comprehensive snapshot of the existing energy system in the four western provinces, including the impact of resource extraction on government revenues.

In 1981, resource royalties accounted for 23.8% of all provincial government revenues in western Canada. There was a considerable range from province to province: in Alberta, royalties were as high as 43.2% of revenues, while the corresponding figures for Saskatchewan (21.0%), BC (5.6%) and Manitoba (1.4%) were much lower.

After tumbling in the 1980s and early 1990s, a surge in oil and other commodity prices in the mid to late 2000s have meant that royalties are once again a major source of income in the region, particularly in the three western most provinces. For western Canada as a whole, royalties made up 20.6% of government revenues in 2008 (the most recent year for which Statistics Canada data are available). Alberta still leads the pack at 33% of provincial revenues, but Saskatchewan and BC have seen the importance of resource royalties grow considerably since the early 1980s. In Saskatchewan, royalties grew to 24.1% of provincial revenues in 2008, while BC saw the share of income from royalties double to 11.2%.

Is this increasing reliance on royalty revenues a good thing for the western provinces? It really depends on your perspective. On one hand, royalties provide governments with more available funds to spend on goods and services—like health care, education, and infrastructure—or to put towards deficit elimination or debt reduction. This, in turn, eases the burden on provincial taxpayers; the more government revenues that come from resource rents, the less taxpayers have to pay out of our own pockets. By reducing the fiscal burden on taxpayers, royalties also contribute to creating a more competitive tax environment which could help attract businesses, investments and skilled workers to western Canada.

However, overreliance on resource royalties comes with its own set of problems. For one, royalties and royalty rates are closely linked to commodity prices which are notoriously volatile and completely beyond our control. While all government revenue sources are prone to fluctuations, royalty income is far more erratic than most. Responsible fiscal planning is an extraordinary challenge when a major source of revenue can fluctuate so dramatically, and unexpectedly, from one year to the next. How do governments make stable, predicable and long-term spending commitments in such an environment? How do they resist the pressure to increase spending when royalty income rises? And how do they maintain that spending level in the face of a negative price shock?

Additionally, the resources in question are non-renewable. To be sure, some of our resource deposits—like the oil sands—are vast, and some like shale gas are only beginning to be developed, but even these won’t last forever. Moreover, environmental concerns and development of alternative energy sources could change future market conditions in unforeseeable ways.

Should we be concerned about the long-term sustainability of our royalty revenues? Should some of this resource wealth be saved for future generations? Are Albertans missing out on the opportunity to add to the Alberta Heritage Savings Trust Fund and convert part of their present wealth into a form that could provide interest revenue in perpetuity? Should Saskatchewan re-introduce its Heritage Fund? Should BC consider starting up such a fund? These questions are further explored in the Canada West Foundation’s "Investing Wisely" Project.

These questions all require careful study and debate in the community, but two things are immediately clear. First, as resource royalties grow in importance for provincial governments in western Canada, steps need to be taken to minimize the impact of resource price volatility on government revenues. Secondly, better public policy is needed to ensure that both current and future generations benefit from present-day extraction of non-renewable resources. 

Michael Holden is Senior Economist and is currently working on creating a detailed and comprehensive snapshot of the existing energy system in the West as part of the Powering Up Project.

by Larissa Sommerfeld

It seems like energy can be created from almost anything these days. In addition to the somewhat standard and predictable renewable sources such as wind and solar power, scientists are now figuring out how to make energy from mountain pine beetle wood and algae (cool!).

Energy sources are diversifying in a big and exciting way. But what’s happened to the nuclear power debate? The majority of the European Union member states, as well as South Korea, Japan, and the US all rely on nuclear power for electricity. In 2008, 14 percent of total global electric energy was produced by 439 nuclear reactors scattered amongst 30 countries. Despite nuclear energy’s importance, some argue that reliance on nuclear power will decline in the coming decade. Where does Western Canada fit into this discussion?

As it currently stands, the nuclear sector is an important contributor to the Canadian economy. Activities related to nuclear energy include the construction and export of reactors, electricity production, and uranium mining and export. According to the Canadian Nuclear Association, the industry generates 15 percent of the nation’s electricity using CANDU reactors (home-grown technology), 71,000 jobs, and $1.5 billion in federal and provincial revenues from taxes.

That sounds pretty good. But the nuclear landscape, and opinions on whether it’s a viable clean energy source, range across Canada.

Eastern Canada is chockablock with nuclear power compared to the West; Ontario serves as the nuclear hub (over half of the province’s electrical needs are met by nuclear power), but Quebec and New Brunswick also rely on nuclear power for meeting some energy needs.

The West stands in stark contrast. Although Saskatchewan has a massive amount of uranium, it has no nuclear reactor.  And the government of British Columbia is outright against nuclear power—the BC Energy Plan blatantly lists “no nuclear power” as a policy strategy. Making nuclear power a reality is perhaps closest for Alberta—Bruce Power Corporation has launched a public relations campaign to garner the support of Albertans for the potential construction of reactors in the northern half of the province.

Apart from BC, government leadership on nuclear energy is slow going in the West. The Alberta government hasn’t shut the door on nuclear power, but so far hasn’t trumpeted the cause either. Saskatchewan’s Energy and Resources Minister Bill Boyd said recently that small-scale reactors could potentially work in the province, but such technology is a decade away. And the government of Manitoba appears to have no firm policies in place advocating for going nuclear. However, nuclear power is being talked about in policy circles, and the former Director General of the International Atomic Energy Association, Mohammed El-Baradei, will be speaking at an event on October 12.

The nuclear debate is complex. Yes, nuclear energy is cleaner than conventional fossil fuels (for example, Canada emits 90 million fewer tonnes of greenhouse gas emissions each year due to reliance on nuclear rather than coal for electricity production). Nuclear energy is also more reliable than renewables, and power plants can function as baseload plants (inexpensive to run, and a guaranteed minimal level of output). However, building nuclear plants can be expensive  and figuring out what to do with nuclear waste can be problematic. Waste is being temporarily stored at nuclear facilities, but in the next few decades, it is anticipated that a central underground repository for the nation’s nuclear waste will be built—with a location still to be determined. The Canadian Nuclear Waste Management Organization is tasked with finding a willing community, but is most likely gearing up for a series of “not in my backyard” protests from citizens.

And, is nuclear energy truly clean? Does it fit in with the current shift to more renewable and “green” energy sources? Can public support be mobilized for nuclear power in the West?

Bottom line: There’s no question that nuclear power is a political hot potato. But governments shouldn’t shy away from including nuclear power on the agenda of the clean energy debate. Demands for electricity are growing, and we have to find ways to meet that demand. Maybe there’s potential for nuclear power to be part of the new energy buffet, ultimately contributing to a cleaner, greener, and more prosperous future.