Last time, Michael Holden highlighted some of the information and key findings of the Canada West Foundation’s recently-released publication, State of the West: Energy – 2012 Western Canadian Energy Trends, focusing on the types and quantities of energy consumed in the region. This week, he examines energy use by sector.

There are five broad sectors across which energy consumption (also known as “final demand”) takes place: residential, industrial, transportation, agriculture and commercial/public administration. For most provinces, the transportation sector, which includes motor vehicles, aircraft, trains, ships and pipelines, is the largest energy user of the five, but in Alberta the industrial sector dominates—the direct result of energy-intensive oil sands production and other activities related to natural resources extraction.

As noted in last week’s blog, there is a significant difference in the intensity of energy consumption across western Canada. While final demand for energy in Manitoba and BC is comparable to levels seen elsewhere in the country, Alberta and Saskatchewan are by far the most energy-intensive provinces in Canada. Per capita energy use in those provinces is almost twice the national average.

It is tempting to assume that the energy demands of mining and oil and gas extraction are responsible for this difference. Indeed, industrial activity does explain much of the gap, but not all. On a per-capita basis, Alberta and Saskatchewan consume more energy than any other province in each of the five sectors identified above. The only exception is agriculture, where per-capita consumption in Manitoba is somewhat higher than in Alberta.

Transportation

The western provinces are relatively large users of energy in transportation. The region as a whole accounts for 31% of Canada’s total population but 39% of transportation energy use. No province in the region consumed more energy in transportation than Alberta, although on a per-capita basis, Saskatchewan was the largest consumer in the country.

There are important differences in transportation energy consumption patterns across the West. Driving is popular across the three prairie provinces; Saskatchewan, Alberta and Manitoba are the largest per capita users of energy in personal vehicles across Canada. BC and Alberta are relatively large energy users in air transportation, while BC is a relatively large consumer of energy in marine activities. For its part, Saskatchewan dwarfs all other provinces in energy consumption in pipeline transportation.

The intensity of energy consumption in transportation has fallen in most provinces over the past ten years, although Saskatchewan stands out as a significant exception to this general trend. Rising energy use in pipeline transportation has caused overall consumption levels to soar in that province.

Industrial

Industrial energy usage varies dramatically across Canada. Because of the energy-intensive nature of natural resources extraction, Alberta is by far the largest overall industrial energy consumer of any province, including Ontario and Quebec. With 11% of Canada’s total population, Alberta accounts for 34% of industrial energy use across the country. On a per-capita basis, industrial energy consumption in Alberta is more than three times the national average. Because of a similar reliance on resource extraction, Saskatchewan is also, proportionately speaking, a major industrial energy consumer. In BC and Manitoba, however, industrial energy consumption intensity is slightly below the national average.

In most provinces, per capita industrial energy use has been flat or has declined over the past 20 years, reflecting a combination of factors including increased energy efficiency and a relative decline in national manufacturing output over that period. In Alberta and Saskatchewan, however, per capita industrial energy use is soaring because of the continued expansion and development of the oil and gas industries in those provinces.

Residential

Led by Alberta, the three prairie provinces have the highest levels of per capita residential energy consumption in the country. By contrast, BC stands as one of Canada’s least intensive residential energy users. However, the intensity of energy use has been falling across the region. In all four provinces, residents used less energy in their homes in 2009 than they did 20 years earlier, echoing a similar trend at the national level.

A number of factors contribute to the higher-than-average levels of residential energy consumption on the prairies. For one, the five major cities in Alberta, Saskatchewan and Manitoba have the highest heating requirements (as measured by average heating degree days) of any large urban centre in Canada. At the same time, a higher proportion of residents in all three provinces live in single detached homes, which require more energy to heat. On top of that, Alberta and Saskatchewan also boast the lowest residential natural gas prices in Canada, reducing the incentive to conserve energy. Finally, building codes in Alberta have a lower energy efficiency standard than in many other provinces, meaning that Albertans on average consume more energy to achieve the same heating/lighting results compared to other Canadians.

Commercial/Public Administration

There is a considerable range in energy consumption in commercial and public administration activity across western Canada. As with all other energy end-use categories, residents of Alberta and Saskatchewan consume significantly more energy compared to residents of other provinces. Per capita consumption in Manitoba is in line with the national average and consumption in BC is the lowest of any province.

It is unclear what accounts for the significant differences in energy consumption; detailed information is not available on the type of commercial activity that takes place in each province. However, two possible contributing factors are climate (as noted above, the number of heating degree-days is higher on the prairies than elsewhere in Canada) and energy efficiency standards in building construction.

Unlike most other sectors, per capita energy use in commercial/public administration applications is rising across Canada, including in all four western provinces.

Agriculture

On the whole, agriculture is not a major driver of energy consumption in Canada, accounting for about 3% of final energy demand across the country in 2009. Not surprisingly, however, agricultural energy use is concentrated in the West—in particular, Saskatchewan and Alberta. The two provinces account for just under half of Canada’s total agricultural energy consumption, with Saskatchewan consuming slightly more than Alberta. On a per capita basis, Saskatchewan is by far the largest agricultural energy consumer in the country, with Manitoba a distant second.

Energy use in agriculture is declining across Canada. On a per capita basis, consumption has fallen by more than 25% across Canada over the past decade. BC and Alberta have seen some of the largest decreases in the country.

governments in many countries around the world have access to similar types of taxes.  The answer comes in the form of an argument that weaves together a number of considerations or perspectives that, when combined, show the penny tax as a fresh, creative, and innovative response that can neatly align local preferences with a locally-determined tax source.  The penny tax would provide cities—but only if voters desire—with a supplement to the property tax.

Fiscal Perspective

The property tax attaches to only one aspect of the economy—real estate.  As such, the tax base is relatively narrow and tax revenues do not always keep pace with population and economic growth.  In contrast, a small local sales tax casts its net across the full range of activity in the economy, and unlike the property tax, growth in sales tax revenue does not have to be achieved by intentionally increasing the rate of tax.  Sales tax revenues always track alongside the economy.  A penny tax will allow cities to retain a small but important portion of the economic growth occurring within the local region, and then direct that to the infrastructure needed to accommodate the growth.  Because federal and provincial governments have also reduced their sales tax rates, there is room to dedicate a small local penny tax to infrastructure.

Demographic Perspective

Today’s cities—particularly the large metros—provide services and infrastructure not only for the local citizenry but also for a broader regional population and a host of visitors, all of whom pay their residential property taxes elsewhere.  This produces a “fiscal disequivalence” where the costs land disproportionately on local taxpayers.  Not only does a small local penny tax helps ensure that all those who benefit from a city—commuters, truckers, tourists, shoppers, business travelers—also help pay for the infrastructure and services they use.  A penny tax will also help remediate current patterns of urban growth, much of which occurs in “metro-adjacent” municipalities just outside the large “anchor” cities themselves.   For some cities, this “donut growth” or “urban fragmentation” is meeting up with a lack of diversity in municipal tax tools to severely press their finances. For proof of this, just talk to officials at the City of Edmonton—a city-region comprised of some two dozen distinct municipalities.

Governance Perspective

Just as cities have grown in size, importance, and complexity, so have the issues with which they must contend.  Many of these new responsibilities are directed toward “people” services and infrastructure as opposed to “property” services and infrastructure.  The property tax is ill-suited to address services and infrastructure to people because the tax base is narrow. A small local penny tax would help increase tax diversity at the local level and provide an opportunity to better match revenue-raising capacity with current municipal expenditure responsibilities.  In short, a penny tax would alleviate infrastructure’s need to better compete for scarce property tax dollars.

Economic Perspective

In many ways, the property tax makes less sense in the new economy.  Property is no longer a key to creating wealth or income in an information economy.  What is more, the property tax can also produce perverse subsidization effects that cause distortions and artificially increases the demand for infrastructure.  For example, properties “close-in” tend to carry higher assessed values and thus pay more tax.  Properties in the “far-flung” suburbs carry lower assessed values and pay less tax.  But, the cost of servicing “far-flung” properties is higher.  This amounts to a subsidy that breaks the link between those who pay and those who benefit.  Since the suburbs contain the great majority of voters, it also leads to artificially increased demands for services and infrastructure because they are not the ones who are paying.   In addition, many municipalities over-tax business properties relative to residential properties, which produce similar subsidization effects.  These realities and perversions of the property tax—which are very difficult to reform—mean that the tax often looks and behaves like a capital tax, which is one of the worst taxes possible.  Sales taxes, particularly value-added (VAT) sales taxes, are perhaps the most benign tax possible with the lowest marginal efficiency cost (MEC) to the economy.  In other words, they do the least economic damage.

Political Perspective

Only locally-raised taxes and locally-decided expenditures ensure the highest level of political accountability.  To fund infrastructure, cities currently rely on the property tax.  But because the tax is insufficient to meet all of their needs, federal and provincial governments have always come along with capital grants.  In the revenue exchange, political accountability and transparency takes a huge hit.  While the municipalities point their finger at the province, the province blames and shames the federal government.   To the greatest extent possible, locally-decided expenditures should be recovered through locally-generated tax revenues.  The penny tax can be part of this “re-jigging” of the municipal tax system.

Taxpayer Perspective

A properly designed and implemented local penny tax stacks up very well against the various principles that should guide tax policy and tax reform.  For taxpayers, a penny tax can be quite fair and equitable, particularly if the rate is kept low, if basic goods like groceries and pharmaceuticals are exempted, and various low income offsets are available like the current GST rebate.  A 1% tax on every $1 spent is simple and straightforward, and because the tax rate is capped and the revenues are earmarked for infrastructure, accountability and transparency is strengthened.  The accountability ante is also upped as the penny tax would be voter-approved and locally-levied.  Administratively, sales taxes already exist federally and in most provinces.  Because the tax machinery is already in place, the tax should be relatively easy and cost effective to extend.

The Heart of the Matter

At the heart of the rationale for a penny tax is the realization that Canada’s large urban centres are heavily and singularly dependent on the property tax.  In many ways, this lack of diversity in tax tools constitutes a disadvantage when it comes to infrastructure investment.  It is important to recognize the benefits that accrue from a diversity of tax tools and revenue levers.

No single tax is entirely fair or neutral with regards to investment patterns, economic distortions, or decisions about location and business inputs.  Nor is every tax equally suited to generating predictable, stable and growing streams of revenue.  No single tax source is equally suited to compensating for inflation, capturing growth in the local economy, or controlling for the problems with free-riding and fiscal disequivalence that inevitably result from more and more people filling the beltways around our cities.  Tax diversity allows the unique disadvantages of one tax to be offset by the advantages of other taxes.  The question certainly is all about a balanced tax regime for local governments.

A small local penny tax that combines the unique features we have identified is an excellent candidate to begin building better diversity in local taxation and meeting the infrastructure challenge in a way that is effective, efficient and equitable, as well as visible, accountable and transparent.  Given the historically high degree of voter apathy in local elections, the penny tax will also stimulate voter engagement by asking them to participate in the process in a meaningful way.

You may also be interested in parts IIIIII, and IV of the “1¢ Solution to a Billion Dollar Problem” series.

– By Michael Holden