An upcoming commission that will look at what companies must pay to extract Alberta’s non-renewable natural resources needs to consider all the new costs industry is likely to incur before making a recommendation on increased royalty rates.
Premier Rachel Notley has promised to re-evaluate the province’s royalty regime for non-renewable resources, to raise corporate income taxes, to promote in-province oil sands processing, and to introduce new carbon pricing. None of those promises exists in a vacuum, and the resulting policies will have big effects on Alberta’s royalty regime and non-renewable resource industries. That means a commission can only take a meaningful look at royalties if its members have details on what other policies Notley will bring to bear on the industry.
An important goal of Premier Ed Stelmach’s 2007 royalty review panel was determining the Alberta royalty regime’s global competitiveness. Many fear that if Alberta charges too much for access to natural resources, investments will go elsewhere.
To compare Alberta to other jurisdictions, the panel estimated the marginal effective tax rate on oil and gas investments. The marginal effective tax rate includes all the taxes and payments businesses are required to make in the course of developing a resource. Ultimately, it’s that rate that businesses care about, not the royalty rate alone, because businesses are faced with other taxes that take away from their bottom line as well.
To estimate the marginal effective tax rate, commission members need to include corporate income taxes, bonus and lease fees, carbon prices, royalties, and any other taxes faced by industry. That means any review of royalties will be insufficient and potentially misleading if it’s conducted before Notley makes clear what other new policies she will introduce, including the promised 12 per cent corporate income tax or potential new policies like a carbon tax.
Since Notley has said she’ll introduce a budget in the fall, it seems like any commission looking at royalties will know what the corporate income tax rate will be. But when it comes to oil sands processing or environmental policies, Notley herself might not yet know the specifics of her future policies.
Notley could use a new royalty review commission to help her evaluate her policy options. Stelmach’s 2007 panel wasn’t given much authority to consider the broader policy impacts of royalty changes, like environmental impacts, but Notley’s legislative proposal from March, Bill 209, contains some hints that her commission could be different.
In Bill 209, Notley called for a standing commission that would provide an annual report measuring and setting targets for royalty revenues from Alberta’s nonrenewable resources. The makeup of the proposed commission is reminiscent of the 2007 panel. Like the 2007 panel, Notley’s commission would have industry experts and economists with the addition of representation for Aboriginal Albertans and for employees in the industry as well as an expert in sustainable development, a field that considers the environmental effects of resource use as well as the economic effects. The commission’s purpose also looks like it would have a key addition: the commission could issue proposals for long-term sustainable management of non-renewable resources.
Nowhere in Bill 209 is the environment mentioned. And the bill was only an opposition proposal with no real hope of becoming law. But these two details—including experts in sustainable development and the authority to issue sustainable development proposals—would give the commission a window through which to look at the effects that oil and gas development, as well as other nonrenewable resource extraction, have on the environment. That window could allow the commission to evaluate the best combination of taxes, royalties, and environmental policies to maximize public revenue while supporting industry and conserving our environment.
The 2007 panel’s report was criticized by some, but its members did a thorough job. They brought in outside expertise, heard comments from industry and the public, and returned a thoughtful and comprehensive report. The panel even recognized the importance of addressing environmental issues and in-province oil sands processing in the future. Notley could do worse than asking a commission of similarly skilled experts to provide analysis and advice on the interplay of her different policy goals.
Some commentators are calling on Notley to just go ahead with royalty changes. Sam Spanglet, who served on the 2007 royalty review panel, has said Notley should just skip the review and hike royalties if that’s what she wants to do. But Notley should take the time she needs to get all her policy ducks in a row.
If Notley and the new NDP government can’t settle on their approaches to the environment and oil sands processing before creating a new commission, the commission’s members should take a strong stance. Either give the commission detailed policies on oil sands processing and carbon pricing, or give it the authority to make recommendations on those policies as well. Otherwise, it could just be a waste of time.
– By Jonathan Luke, Canada West Foundation intern